Another rough-and-tumble Greek debt crisis day forced the euro back down again, though it’s remarkable it’s not down more, but MoneyShow’s Jim Jubak points out that the relatively restrained reaction fits with the financial markets’ current read of the crisis as much more about Greece than about the euro.
So much for the euro rally.
After climbing yesterday to $1.0864 on a Federal Reserve statement pointing toward a September rather than June initial interest rate hike, the euro is back down today—hard—to $1.0535, a 1.92% drop.
The culprit is one of the nastiest, short-tempered days in a Greek debt crisis full of nasty and short-tempered days.
EuroZone leaders, and I use the term advisedly, are in Brussels for another summit with the hope of breaking the deadlock that has seen none of the 7.2 billion euros of bridge financing tentatively approved in the last solution to crisis actually disbursed to Greece.
The hang-up is language in the agreement that committed Greece to following through on the austerity reforms promised in the last bailout package and promises by the Greek government not to change economic policy without consultation and approval by EuroZone members. So far, the Troika that decides if Greece is living up to its agreements has not signed off on Greek progress toward meeting its goals, and yesterday, the Greek parliament passed measures to give the hardest hit Greeks help with food and utility bills, without consultation with other EuroZone members, that clearly mark a change in economic policy.
As you might expect at a time when European headlines are obsessed with whether the Greek finance minister really gave the finger to the German finance minister, the ensuing debate has been marked by calm reason. (The video of the finger event might be a hoax, but it’s possible that the claim that it’s a hoax, is itself, a hoax.)
So, for example, Eurogroup president Jeroen Dijsselbloem has noted that Greece might need to impose capital controls to prevent cash from leaving the country if it can’t reach an agreement with EuroZone creditors. That has helped produce another run on Greek banks with depositors withdrawing 300 million euros yesterday. That’s the biggest daily outflow since before last month’s agreement to extend the bailout.
Or this from European parliament president Martin Schulz to German radio: Greece’s financial situation is “dangerous” he said. “In the short-term, two to three billion euros are needed to keep to the existing obligations.” The ability of the Greek central bank to supply funds is almost exhausted, he added. Greece faces repaying 1.7 billion euros this month.
It hasn't helped today either that the European Central Bank approved only 400 million euros in emergency lending of the 900 million requested by the Greek national bank. The European Central Bank’s supervisory arm wanted to prohibit Greek banks from increasing their holdings of short-term government debt completely, but the ECB’s Governing Council rejected that proposal because it would have further inflamed political discussions.
Under the circumstances, it’s actually rather remarkable that the euro is down only 2% today. Greek bonds have taken a much bigger hit. The yield on the two-year Greek note, for example, rose to 23% today, up from 21.6% yesterday. The yield on the 10-year note has climbed to 11.6% from 11.3%.
The relatively restrained reaction of the euro does fit with the financial markets’ current read of the crisis as much more about Greece than about the euro. Greece is in danger of default, but that is currently seen as a Greek problem.
The more that becomes the accepted wisdom, however, the fewer politicians will be willing to risk voter ire to argue that EuroZone members need to do everything they can to keep Greece in the currency union.
