The Euro has been crashing and
will swing wildly with every Greek opinion poll until the next election.
Yields are rising in Spain and Italy and this trend will continue as long as
bond traders expect Greece to be ejected.
Although some European
economies are victims of real estate bubbles, many of the region's troubles
are self-inflicted. The EU has been dithering about how to handle the crises
for three years and providing nothing but half measures and stopgap
"solutions". This has to end or things will continue to get worse
before they get better.
As soon as the campaign in
Greece restarts the rest of the continent has to make it clear and be
unequivocal that the vote is about being inside or outside the Euro zone and
nothing else. Even if there is room to give Greece some breathing space on
austerity measures it must soon be made clear that loosening of conditions
will only apply if there is a pro-bailout government. Even then, Greece may
breach some debt covenants before it has time to complete a new vote,
assuming that vote results in some sort of coalition.
Many of the debtor nations
have been and are making larger strides in dealing with their debt overhangs.
The market won't care about this if bond traders get to play "who's
next?" if there is a Greek exit. Greece should have been ejected from
the EU three years ago. That didn't happen so northern Europeans and
particularly Germans will have to be prepared to do what it takes to hold the
zone together or face the consequences.
Most Greek debt is no longer
held by banks. There would be fallout in the swap markets but if the February
deal is anything to go by it will be smaller than many fear. The important
thing is to ensure the bond markets for other peripheral countries are
protected. The ECB should be prepared to extend unlimited (and we mean
unlimited) buying power in defense of Europe's bond markets. It's much more
important to ensure Spanish, Italian and French bonds don't crash than it is
to save Greece. Tough sledding, but that's just how things are.
Until there is some visibility
in Europe gold and other commodities will track the Euro and resource stocks
will continue to see fear and liquidity generating selling. It's depressing
to see an avoidable problem blow up yet again. Time really has run out for
Greece and for Europe. Let's hope cooler heads prevail-very soon.
