Tag Archives: italy

It is only a matter of weeks since a number of European leaders, including the French President Nicholas Sarkozy and Italian Prime Minister Mario Monti, declared the euro-zone crisis to be “almost over.”  Financial markets jumped to the same conclusion following the large provision of liquidity by the European Central Bank (ECB) in two large three-year long-term refinancing operations last December and late-February respectively.

The calm provided by the ECB’s unconventional liquidity facilities proved fragile however, and stress returned to the zone’s sovereign bond markets once data confirmed that economic conditions continue to deteriorate.  The contraction in economic activity is frustrating efforts to meet ambitious fiscal goals, with both Spain and Italy indicating that they will not reach the initially projected deficit targets.  The evidence confirms that the fiscal consolidation strategy is not working, and a less restrictive policy mix will ultimately be required to save the euro-zone’s troubled periphery.

The economic challenge facing the periphery is far more complex than simply reversing the large fiscal deficits and stabilising the outstanding stock of public debt relative to GDP.  The sizable external deficits that persisted in the years before turmoil struck must be eliminated in order to stabilise the level of net external liabilities as a percentage of GDP.

The average current account deficit among the periphery increased from just four per cent of GDP in 2003 to almost eleven per cent by the time the crisis struck, which caused net external liabilities to rise to more than seventy per cent of GDP in Greece, Portugal and Spain.  Meanwhile, net payments abroad averaged three per cent of GDP in Greece, Portugal and Spain by 2007, or one-quarter of the current account deficits in each country.

By 2007, external debt indicators all vastly exceeded levels that had previously triggered crises in developing countries, and continued to deteriorate in subsequent years.  The latest available data indicates that net external liabilities exceed 100 per cent of GDP in both Greece and Portugal, are close to 100 per cent in Ireland, and more than 90 per cent in Spain.  Not surprisingly, net payments abroad are capturing an ever greater share of GDP.

In order to return the external indicators to more sustainable levels and avert a balance of payments crisis, simply eliminating the current account deficits is unlikely to prove sufficient; large surpluses will be required over several years in order to paydown external debt.  However, unlike previous balance of payments crises, this task cannot be accomplished via a substantial depreciation of the exchange rate, which means that the adjustment required can only be realistically achieved in the short-term through a reduction in domestic demand.

A decline in domestic demand however, is virtually certain to lead to a contraction in economic output in those peripheral countries including Greece, Portugal, and Spain, where trade openness is relatively low.  A fall in the overall level of economic activity makes it all the more difficult to meet ambitious fiscal targets, which means that the upward pressure on borrowing costs is unlikely to abate.  In turn, the external deficit is likely to prove more difficult to finance, increasing the pressure to effect the necessary adjustment more rapidly.

Further, the ability to run a current account surplus in the troubled countries – apart from Ireland – is constrained by the de-industrialisation of these economies in the recent past.  This means that the economic structures of Greece, Portugal and Spain are such that they can be expected to run external deficits for a ‘normal’ level of domestic demand.

The bottom line is that a sizable contraction in domestic demand will be required to return external debt indicators to a more sustainable level.  The cost in terms of higher unemployment however, is a cost that the sovereigns in difficulty may not be willing to pay.  The rate of joblessness is already unacceptably high in the periphery, particularly among the young, and further declines in the numbers employed may well lead to social unrest and political upheaval.

The external position has already shown marked improvement in the euro-zone’s periphery – apart from Greece.  The current account in Ireland has been close to balance since the beginning of 2010, while the deficits in both Spain and Portugal have narrowed considerably from almost ten per cent of GDP in 2007 to below four per cent last year.  Nevertheless, despite the impressive progress, further adjustment is required and particularly so in the Iberian Peninsula where the incremental social costs may well prove to be too onerous.

The fiscal consolidation strategy currently being applied in the euro-zone’s periphery is not working, and will continue to fail so long as much-needed private sector deleveraging and a reversal of unsustainable external deficits continue to frustrate government’s best efforts.  A less restrictive policy mix will ultimately prove necessary to save the euro.

Previously posted on www.charliefell.com

 

Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

­­Our Two Cents – Week of 1/16/12

While we saw Tom Brady lead the New England Patriots to an outstanding playoff victory, we watched world leaders attempt to continue restoring economic confidence through consumer spending, market performance and fiscal activism.

In the U.S., economic optimism continues to rise as America displays more signs of employment and consumer confidence. The National Retail Federation has predicted that U.S. retail rates will growth 3.4 percent to $2.53 trillion in 2012. NRF President Matthew Shay said Americans should be confident about consumer spending—“Our 2012 forecast is a vote of confidence in the retail industry and our ability to succeed even in a challenging economy. Over the last 18 months, retailers have been on the forefront of the economic recovery—creating jobs, encouraging consumer spending, and investing in America.” Additionally, U.S. retail Forex capital grew by $3 million in November 2011. Though the growth is surprisingly smaller than October, which grew by 30 million, experts believe lower volatility and the year-end slowdown might have contributed to the diminished growth.

Throughout the world, last week began with booming markets. The Italian market increased more than 2 percent, and France’s CAC-40 Index posted a bump of a little more than 1 percent. Even one of the weakest world markets—the Shanghai Composite—jumped more than 2 percent. Unfortunately for Europe, market confidence reversed by week’s end. Ratings services Standard & Poor’s downgraded credit ratings of nine countries—including Italy and France—as political and financial leaders continue to devise solutions to the euro crisis. The Jan. 13 downgrade resulted from the December warning that S&P might decrease credit ratings of 17 nations because politicians had been moving too slowly with reforms for the crisis. As a result of the news, European leaders have vowed to focus on “progress” to restore economic growth. Italian Prime Minister Mario Monti and European Council President Herman Van Rompuy met in Rome Jan. 16 to discuss economic restoration. Monti said S&P applauded Italy’s fiscal acts, and Van Rompuy said he believed leaders should refocus their aims by establishing “sustained, committed” efforts. Southeast from Italy in Greece, officials and residents discussed a possible return to the drachma if the country can’t save its membership in the euro zone. According to polls, nearly 80 percent of Greeks say they want to stick with the euro and avoid reinstituting the country’s former currency. Prime Minister Lucas Papademos has vowed to do whatever it takes to keep his nation in the euro zone.

 

 

-------

Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

­­Our Two Cents – Week of 1/3/12

The crystal ball atop New York City’s Times Square has dropped, champagne glasses have clinked and confetti has strewn—all signs welcoming 2012. As we said goodbye to a year that saw economic commotion, we greeted the new year with a refined sense of optimism for the U.S. and equal thoughts of hope for abroad.

Americans are more confident about 2012 after what they say was a less-than stellar 2011, according to an Associated Press poll. Nearly 70 percent of Americans said 2011 was a poor year because of continuing economic crisis, and 62 percent said they were hopeful for a more positive 2012. About 37 respondents said they saw economic improvements coming within the next 12 months, and almost 40 percent believed their personal financial situations will improve. Signs that the U.S. economy is starting to accelerate are already coming to fruition. Experts say an improving job market and increasing retail sales—especially in the past holiday season—are reasons for why growth in the U.S. economy may hasten even if conditions abroad aren’t replicated. Holiday sales during the week ending Dec. 24 ascended nearly 15 percent from the same period in 2010 to $44 billion, thanks to Christmas Eve falling on a Saturday.

While the U.S. conditions are rebounding, Europe’s markets are starting 2012 on the right foot. Italy’s FTSE MIB index is up nearly 1 percent, and Germany DAX is also up more than 1 percent. Yields in Italy are down to below 6.9 percent.

In the last few days of 2011, Italy’s Treasury paid significantly less to borrow money for six months than it did a month ago, restoring some senses of economic confidence. Even though Spain has slipped into recession, the country’s inflation has eased much more than expected in December to its lowest level in 13 months. Inflation rates also relaxed in Germany for the third straight month.

Speaking of Germany, it received the highest mark on the Bank of Montreal’s economic report card of the world’s most important economies in 2011. The nation earned a score of 89.2 because of its 2.5-percent inflation rate, 7.1-percent jobless rate and 1.2-percent budget deficit. Greece closed the list at No. 12 because of its 3.2-percent inflation rate, 16.6-percent jobless rate and 5.9-percent budget deficit. The U.S. earned the No. 6 spot for its 3.2-percent inflation, 9-percent jobless rate and 10-percent budget deficit. The bank based ratings on low inflation, low unemployment and low budget deficits.

The year 2012 also observes the 10th anniversary of the euro. While some individuals blamed the euro for causing Europe’s economic meltdown, the monetary unit could become the world’s leading single-currency alliance if leaders can succeed in tightening fiscal integration, according to one official from the European Central Bank. ECB policymaker Christian Noyer said if European officials can implement the actions from the Dec. 9, 2011, emergency summit, the union will emerge stronger.

 

 

-------

Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

News broke Sunday night reporting the death of North Korea’s enigmatic leader, Kim Jong Il, followed swiftly by debate about the impact his successor Kim Jong Un will have on the country’s economy and society – as well as the market’s reaction to his father’s death.

Meanwhile Europe continued to dominate world headlines as it devises next steps after proposing a treaty last week designed to strength fiscal discipline for the European Union. In the United States, the economy continues showing signs of improvement as it eases some minds heading into the highly anticipated holiday week.

In Europe, Italian Prime Minister Mario Monti won a confidence vote from officials to expedite its 30-billion-euro budget crafted to restore the country’s economic confidence and revive its stagnant growth. The passage comes after a week of strikes from Italy’s three biggest labor unions because they say Monti’s package will hurt workers, pensions and the country itself. After passing the House, the measure now moves to the Senate where it’s expected to be actioned by Christmas. While Italy seeks to improve its economy, Poland has been recognized for its robust economy. Experts believe that Poland may have the last healthy economy in Europe as the country’s capital Warsaw received revitalization and the country overall experienced economic growth and increased foreign investments. The question, though, is Poland going to remain as strong as it is now? Because many of its neighbors are suffering in the euro zone, residual effects could spill over the borders to Poland—especially because the country’s main stock index is down 24 percent since April. Unfortunately, some other European countries aren’t in as great shape as Poland. France could see a downgrade of its triple-A rating by Standard & Poor’s. French officials say the speculated credit lowering would be “cataclysmic” to its economy. Germany is still trying to lead through the crisis, opposing euro bonds and lifting bailout cap. In Greece, the nation has abandoned the euro and returned to its drachma currency, and in Britain, Prime Minister David Cameron faced hecklers about vetoing the proposed European Union treaty.

There was good news in the United States last week. Retail sales rose for the sixth straight month, increasing 0.2 percent in November and showing signs that the U.S. economy is growing. Consumer prices also remained steady as the consumer price index went unchanged last month in November. Jobless claims dropped to 366,000, marking a three-year low and signal some recovery to the job market. In the hedge fund world, legendary hedge funder Julian Robertson of Tiger Management Co. is explaining why so many hedge funds are now cropping up. He says the hedge funds business is becoming tougher because more hedge funds are being created as they’re the best way to pay the experienced Wall Street guys.

 

 

-------

Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Major activities in the euro zone economic crisis, including proposed amendments from European leaders and austerity packages from Italy, topped our transaction of the biggest currency markets headlines.

France and Germany spearheaded negotiations about new fiscal plans for the 17-member euro zone, issuing proposed amendments to Europe’s governing treaties to provide better economic governance to nations. Meeting at Élysée Palace in France, French President Nicolas Sarkozy and German Chancellor Angela Merkel prepared proposals they would deliver to the full European Union Dec. 8. Some proposed amendments include automatic penalties for countries that exceed European deficit limits as well as the creation of a monetary fund for Europe. Sarkozy said he hoped the treaty changes would be ready for ratification as early as March 2012.

On Dec. 4, Italian Prime Minister Mario Monti unveiled for his country a 30-billion euro austerity package, which includes raising taxes and the pension age, in hopes of harnessing the euro zone crisis. He said the package was painful, but important, as he also renounced his own salary as prime minister and economy minister. Late last week, Sarkozy spoke to French voters about the economic slowdown and rising unemployment. His speech came on the heels of remarks from European Commissioner for Economic and Monetary Affairs Olli Rehn about the euro zone entering a “crucial” 10-day period. During this time, nations must focus on building “convincing” financial protections and tightening economic governance, as Sarkozy and Merkel have outlined.

While Italy, France and Germany devised reforms, Greeks returned to simpler ways of life. Because of Greece’s debt, many inhabitants have defaulted to bartering. In the small fishing village of Volos, which is about 200 miles north of Athens, many residents have been buying and selling goods from each other and vowing to neighbors during harsh economic times. In the United Kingdom, the British pound sterling emerged as a safe haven for investing because demands for British government bonds rose. Investors also turned to the pound sterling because it was up 2.1 percent against the euro since early September.

Across the Atlantic, the United States saw some signs of hope for jobs. According to the U.S. Labor Department, unemployment dropped to 8.6 percent. In November, 120,000 jobs were added, up from 100,000 from October. The good news was that the American economy grew, even though conditions abroad waned. But what weren’t waning were the wallets of some Connecticut hedge fund managers who won a $254-million Powerball drawing. The three winners pocketed the state’s biggest lottery ever and have donated some of the money to people in need.

 

 

-------

Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

While turkey and gravy were on our minds last week, we didn’t forget about helpings of headlines that included holiday shopping, European finances and the NBA lockout. Here’s our feast of news for the week.

Black Friday’s numbers were certainly in the black. The day-after-Thanksgiving shopping extravaganza, which kicks off the holiday season, bagged a record 226 million shoppers who visited stores and websites this past weekend. According to the National Retail Federation, the number of shoppers increased from 212 million last year, and the average holiday shopper spent nearly $399, up 9.1 percent from about $365 last year. Total spending for the weekend generated an estimated $52.4 billion. That’s some good news for the U.S. economy as Americans are still spending in an economy that’s struggling to produce jobs. Across the Atlantic, the European economic crisis is still escalating. President Barack Obama is meeting with top European Union leaders to discuss how the U.S. can aid and help prevent global economic backlashes. According to Moody’s Investor Service, “all of Europe’s sovereign ratings are being threatened by the ‘rapid escalation’ of the crisis,” and the Organization for Economic Cooperation and Development is warning that the region could face further economic despairs. As the crisis engulfs other European nations, Germany refuses to bailout her other nations because it has been the go-to sibling for financial assistance. South of Germany, Italy’s newly installed Prime Minister Mario Monti is busy at work reviewing the country’s finances as he tries to steer Italy to positive financial waters by preparing new budget measures. In the hedge fund world, the GlobeOp Forward Redemption Indicator for November measured 3.44 percent, up from 2.51 percent in October. Experts forecast redemption requests will increase as year-end approaches. Rounding out this week’s news is the NBA lockout. Some lawyers representing the players and owners have charged more $1,000 per hour for services. Of course, fans, local restaurants and vendors have also faced the brunt of revenue losses from the lockout, but good news is that basketball—and hopefully some in-the-black revenues—is expected to tip off Christmas Day.

 

 

-------

Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Mamma mia! What a week it’s been in the currency markets. Let’s get right to it.

Italy dominated much of the ink last week as its prime minister announced his resignation because of the country’s debt crisis. Prime Minister Silvio Berlusconi stepped down Nov. 12 after Italy’s government passed crucial economic reforms demanded by the European Union. He was replaced by economist Mario Monti, who’s serving as premier-designate. Aside from Berlusconi facing scrutiny for scandals and failures during his service, Italy is in fiscal turmoil because the country’s debt is larger than the combined economies of Portugal, Ireland and Greece. Not to mention its bonds are shattering the 7-percent level, worrying financial officials as the world’s eighth largest economy could potentially spawn an unmanageable economic situation. There was some good news for Italy Nov. 14 when it sold some short-dated bonds via a sale that had been viewed as “a key test of demand for Italian debt.”

In Greece, the country named former European Central Bank Vice President Lucas Papademos as its next prime minister, hoping his experiences can help right Greece’s economic ship. Despite the turnover of Italy and Greece, nearly 80 percent of Germans believe both the euro will survive and Chancellor Angela Merkel is handling the economic crisis well.

In the U.S., hedge fund experts are already betting that 2012 will see more investors and shopping around for investments. According to the 2012 Preqin Hedge Fund Investor Review, 10 percent of investors plan to invest only with new managers in the new year while nearly 50 percent intend to seek new relationships. Unfortunately for U.S. retail foreign exchange traders, some new rules and strict enforcements are causing some trading restrictions. According to a LeapRate report, currency traders have shrunken to their lowest levels in years because new regulations and legislation such as the Dodd-Frank act that have limited trading and the amount of leverage brokerages can offer individuals. On the jobs front, September saw the most job openings in three years as employers advertised more positions during the month. Many experts are hoping that’s a sign companies may increase hiring. The U.S. Labor Department said businesses and governments posted 3.35 million job openings—a 7-percent increase from August and the most since August 2008. Some more optimism for U.S. jobs last week included the number of jobless claims dropping to 390,000—well below the 400,000 mark that analysts expected. Additionally, the U.S. trade balance deficit reported below expectations, hitting 43.1 billion—also well below the expected 46.1 billion. To finish positively, and celebrating the recent New York City marathon, successful long-term investors are being compared marathoners because “they must be well prepared, resilient, disciplined and focused” to go the distance.

 

 

-------

Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

When most people—at least us here at Currensee—hear Italy, we associate the delicious food. Because we’re located footsteps from Boston’s historic North End, the scrumptious smells of cannolis far too often waft into our office. After all, as Dean Martin croons, that’s amore.

While sweeping seascapes of the Amalfi Coast may race into your head as you swirl your pinot grigio, things in the boot-shaped country haven’t been a bella vista. Because of the European economic crisis, Prime Minister Silvio Berlusconi said Nov. 8 he would resign his prime ministership after parliament passed urgent budget reforms. During his service, Berlusconi also faced strings of humiliations, scandals, defeats and failures.

Aside from Berlusconi’s resignation, Italy is in fiscal turmoil as the country’s debt is larger than the combined economies of Portugal, Ireland and Greece. Experts worry that the Italian economy, the eighth largest in the world, will fuel a potentially unmanageable economic situation because its bonds are shattering the 7-percent level to a new high. As history showed, once Italy’s fellow PIIGS nations—Portugal, Ireland and Greece—surpassed 7 percent, their borrowing costs increased and eventually caused them to seek bailouts.

With a history dating back to Charlemagne’s reign in the late 600s and early 700s, the lira’s (lire for plural) official users are Italy, San Marino and the Vatican City. This is our third post in our new series about “currency culture,” where we examine the history of different world currencies and how they play a role in popular culture (read our previous posts about Greece’s drachma and Switzerland’s franc). With an introduction as stylish as a fashion runway in Milan, here are some interesting facts about the Italian lira:

  • Form of currency from 1861 to 2002, including during the Napoleonic Kingdom of Italy between 1807 and 1814
  • From 1999 to 2002, lira was a national subunit of the euro
  • Banknotes available in 1,000₤, 2,000₤, 5,000₤, 10,000₤, 50,000₤, 100,000₤ and 500,000₤; coins available in 5₤, 10₤, 20₤, 50₤, 100₤, 200₤, 500₤, 1000₤
  • Banknotes feature prominent Italians such as artist Raphael, composer Vincenzo Bellini, physicist Alessandro Volta and physician and educator Maria Montessori
  • Lira issued by Banca d’Italia, Italy’s central bank headquartered in Rome
  • Major renovations and restorations to the Coliseum between 1993 and 2000 cost 40 billion lire
  • The traditional Italian children’s song “Mamma Mia, Dammi Cento Lire” means in English “Mom, Give Me a Hundred Pounds”
  • Jimmy Lira is a character in the 2009 video game “The Godfather II,” based on the 1974 crime drama “The Godfather Part II”
  • Her first taste of fame at age 14, actress Sophia Loren was crowned a winner in a beauty contest that included a prize of 23,000 lire
  • Late fashion designer Gianni Versace in his will left his partner Antonio D’Amico a pension of 50 million lire a month (for life)
  • Retired Italian soccer player Robert Baggio in 1990 was sold to the professional soccer club Juventus for 15 billion lire

You may be lir-y about Italy’s current state of politics and economics, but the lira’s history might be just as intriguing as the catacombs of the Vatican and waterways of Venice. If you’re still lucky enough to have the currency, holdfast to it and don’t make him an offer he can’t refuse.

-------

Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

In the United States this week, we were twisting and shouting like a 1960s disco track, while Italy wasn’t feeling the amore from financial officials and Greece wasn’t succeeding in its Olympic financial fiasco. Here are the top posts from last week:

The markets were expecting the Federal Reserve to announce Operation Twist, in which the Fed would sell short-dated Treasury debt and use the proceeds to buy long bonds. The Fed initiated a similar act in the 1960s, but with today’s numerous economic uncertainties – high unemployment rates and consumer debt – this small step is unlikely to create much spending. While America grappled with its monetary quandaries, Europe tried sorting its financial flounders. Standard & Poor downgraded Italy’s credit rating, saying arrivederci to the country’s A+ grade and ciao to its A mark with a negative outlook. Across the Adriatic Sea, Greece was also continuing to experience its continued economic pounding as it straddled the brink of default. The European Union

commissioner has said “the EU will not abandon Greece or let it default uncontrollably.” France is planning a 10 to 15 billion euro recapitalization plan for five top banks combating the debt crisis, causing a formal denial from financial ministries. The ministries said the government held discussions with leading banks about their state of heath, but denied bailout offers. One top financial executive said “French banks have a sufficient capital base compared to other European banks and they are making profits.” Also in Europe, the Swiss bank UBS’s chief executive resigned Sept. 24 after a $2.3 billion rogue trading loss. Oswald Greubel’s resignation ends days of speculation about whether or not he would retain his top post among one of the biggest scandals to hit the Swiss bank.

-------

Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

3 Comments

The Euro Zone periphery countries are major news drivers in the markets right now. Developments surrounding these so-called PIIGS (Portugal, Ireland, Italy, Greece, Spain) have become big drivers in not just the euro, but in the whole forex market. In fact, they have been moving stock, bond, and commodity markets as well. No doubt this is something which will carry on for a while.

The Greek bailout is probably the most dominant aspect of the sovereign issues right now. There have been voices on all sides talking about the need for a Greek default and exit from the euro, the extreme negative impact of a default/exit on the markets making that unthinkable, and everything in between on the opinion scale. I want to speak to the euro exit idea in this post.

Think on this question. What happens if Greece leaves the single currency?

Those who favor that kind of solution – or who at least think that's the inevitable course – see that kind of move as being a way for Greece to clean the slate and become more competitive. The latter would be as a result of what would presumably be a weaker drachma than the euro. That would be good for the balance of trade, at least in theory. Sounds pretty good, right?

I'd put forth two potential major problems, however.

First, if Greece goes back on the drachma and it does indeed lose value relative to the euro, what impact would that have on the price of goods for businesses and consumers? Does Greece import a lot from the Euro Zone? Would the weaker drachma produce a price inflation via import prices? That certainly wouldn't help the Greek economy at all.

Second, what happens to the existing debt of government, businesses and individuals that is currently denominated in euros? In a falling drachma situation, the cost of debt maintenance for euro-denominated liabilities would rise. That could have a potentially meaningful negative impact on the Greek financial system and economy, an impact not improved at all if there's a rash of defaults.

There's been a serious issue with this very sort of problem in Eastern Europe where consumers took out loans denominated in Swiss Francs. The Franc has been rising steadily for some time now, making those mortgage payments in local currency terms get more and more expensive to the borrowers. Imagine the impact on your monthly budget if your mortgage payment rose by 40%, which is about how much the Franc has gained against the dollar in the last 12 months.

So the question is what kind of exposure are we talking about here? Does the Greek private sector have a major euro liability exposure?

The impact of a weak drachma on the Greek economy in these sorts of terms is not something I've seen any discussion of so far. If a removal from the Euro Zone is to be contemplated, the questions above would have to be satisfactorily answered.

Looking for answers and more information? Currensee is hosting Charlie Fell, Jamie Coleman and Bob Iaccino on July 21st at 12PM EST to discuss. Register for their free webinar here.