Let’s take a look at the bailout package for Greece as agreed to by European leaders in Brussels.
Here is the key excerpt of the (only) two-page “Statement by the Heads of State and Government of the Euro Area.”
Please note, every word is important.
“The Greek government has not requested any financial support. Consequently, today no decision has been taken to activate the below mentioned mechanism. In this context, euro area member states reaffirm their willingness to take determined and coordinated action, if needed, to safeguard financial stability in the euro area as a whole, as decided the 11th of February. As part of a package involving substantial International Monetary Fund financing and a majority of European financing, euro area member states, are ready to contribute to coordinated bilateral loans,” it said.
“This mechanism, complementing International Monetary Fund financing, has to be considered ultima ratio, meaning in particular that market financing is insufficient. Any disbursement on the bilateral loans would be decided by the euro area member states by unanimity subject to strong conditionality and based on an assessment by the European Commission and the European Central Bank. We expect euro member states to participate on the basis of their respective ECB capital key,” it continued.
“The objective of this mechanism will not be to provide financing at average euro area interest rates, but to set incentives to return to market financing as soon as possible by risk adequate pricing. Interest rates will be non-concessional, i.e. not contain any subsidy element. Decisions under this mechanism will be taken in full consistency with the Treaty framework and national laws.”
So let’s simplify what that means.
Yes, there is a bailout package, but there remain many issues yet to be discussed among EU leaders.
Yet overriding any concerns about such protracted bureaucratic processes is the growing realization that the real value of the euro will now become the sum of its parts. The “German mark premium” is no longer applicable to the euro.
Believe me, it’s over, it’s gone.
During the “pre-Greek-crisis” period, investors perceived the euro as synonymous with the German mark.
In fact, we have only to look back at the minimal yield differentials that were in place between German bunds, which are the German equivalents to the U.S. Treasuries and the EU “periphery” sovereign bonds.
The recent crisis has brought to light that we — yes I include myself — were wrong to consider the euro as the much-desired offspring of the German mark.
For the time, I really don’t know if we can see the euro enjoying an extended relief rally.
Keep in mind, next week we have national holidays across much of Europe and Friday in North America. We could see some interesting moves in the currency markets next week.
In my opinion, long-term investors should keep considering the risks of the euro staying firmly on its current downward path for some time to come.
People’s Bank of China Deputy Governor Zhu recently warned that the Greek debt crisis is just the “tip of the iceberg,” which leaves us with the real question of which euro-zone member will require support next.
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