No Relief in Sight for the Eurozone

12/17/2012 8:30 am EST


Kathy Lien

Managing Director and Co-Founder BKForex LLC, BK Asset Management

With the ongoing European debt crisis currently on simmer instead of boil, currency analyst and trader Kathy Lien shares her outlook for the Eurozone and the euro.

We just can’t seem to escape the questions and the problems with the political and economic landscape of Europe. I’m here with Kathy Lien, an expert in the currency market. Kathy, what do you think about Europe?

Wow, I mean it’s just one big mess that just gets uglier and uglier by the day. I mean I think that there’s just way too much pride and political agendas that are really hampering significant progress in Europe.
One of the greatest challenges that we have right now and what’s kind of hampering Greece is that not only is the troika—which is an agency group that’s tasked with coming up with these aid programs for Greece—basically fighting with Greece, but they’re fighting with each other.

I think that these different political agendas are really causing a big problem for the euro. Operation Outright Monetary Transactions from the ECB has stabilized the markets in some sense. It took Spanish ten-year bond yields off of their monstrously high levels.

Right, people kind of calmed down a little bit.

Yeah, people have calmed down; the markets aren’t going to collapse suddenly. But it hasn’t necessarily resolved the problem.

I think that it’s going to be a problem that will be here with us for some time. If you think about Outright Monetary Transactions, it is the availability of the backstop that has helped stabilize the markets, but investors still really want to see this program being tested. Through Spain, actually, going up to the bailout window and begging for help.

Right, and if that program were really instituted and it really started to take effect, it would also come simultaneously with a lot of worries about the European economy. It begs a question: are we out of the wood yet? The answer seems to be no.

I don’t think we’re going to be out of the woods for a while. This is the reason why the euro is the region’s greatest asset, as well as its greatest problem, because you have 17 different countries and the political and economic agendas in these different countries are not aligning with the money policy. The Germans don’t want to help Spain.

Just imagine if you were asked, your tax is already increased and you’re asked to see your taxes increased even more to help someone else when you’re struggling and you barely have any money to pay. You’re not going to want to.

It brings up the question: is in a world where money can be printed almost at a moment’s notice and in enormous quantities, is this really an economic problem or is it a political problem for the euro?

I think people realize that this is more of a political problem. That’s what the ECB is screaming and yelling about, is that we can’t do this ourselves. We need you guys to have true fiscal reform. We need you to stop having that 50-year-old retirement age and get more in line with the rest of the world. I think they realize that.

If you imagine, too, these are politicians and these policies are extremely politically unpopular, and it’s politically unpopular that you have these really ugly riots that are happening. It’s not an easy task, and that is why I think it’s something that can haunt the markets for a year or another two years.

The only way out of this really is growth. It’s a growth phase. It’s not going to come out of Europe, but it’s growth. I think everyone is kind of skeptical about where this growth is going to come from.

If we fail politically and economically in Europe and it could be a slow grind, can you see the euro coming back to levels like $1.18, $1.15, or $1.10 even? Is that too out of control?

That’s pretty low. $1.24, $1.25 would not be out of the question; $1.10, I think, would take something a lot more severe. I don’t necessarily see that happening.

It’s a word of caution for individuals that think it’s all about to end suddenly, and it’s an argument for a more measured approach.

Very much so.

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ECB and Fed Causing Shifts in FX Markets

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Latest Greek 'Solution' Falls Flat

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