The Euro, after failing to crash through the $1.18 level, has bounced up over $1.23. Pinched short sellers and the financial press are openly wondering whether this signals that all in Euroland is well.
It appears that Europe's "shock and awe" $1 trillion rescue package has bought a respite from the "wolf pack". In particular, the ECB's unlimited, cheap three-month loans to banks through the end of summer should keep the financial system lubricated.
How long will this work?
Ambrose Evans-Pritchard, who has been covering the unfolding European debt crisis, reports how French financial group AXA calculates that this has only forestalled the reckoning by 18 months max.
With respect to Greece, a fundamental assumption of the EU/IMF bailout plan is that the Greek problem is a mater of insufficient liquidity, and not solvency. EU officials are adamant in their insistence that a Greek debt 'restructuring' (aka default) is out of the question. And it may be out of the question due to growing speculation that Greece's now junk rated debt has found its way deep into the bowels of Frech banks and insurance companies. Even with the bailout, Societe Generale just announced a projected 1 billion euro loss on "risky" assets for 2010. The implications of default on firms like Societe Generale, which has approximately 13 billion euros in exposure to european sovereign debt, could be catastrophic. Certainly this provides some color on last month's news that French President Sarkozy engaged in a high stakes game of chicken when he threatened that France may leave the Euro.
The current EU/IMF plan for Greece will actually INCREASE public debt from the current 120% to 150% of GDP in 2014. And if Greece continues to be unable to raise debt on their own in the public markets, the debt provided by the EU/IMF will be at some quasi "market" rate (the true market rate is currently 575 basis points higher than German bunds). A natural question is how are the Greeks going to dig themselves out of what was an already deep and now deepening hole?
The EU/IMF bailout squad would like people to believe that 1) Greeks will continue to cut wages and save, save, save to pay off foreign creditors, and 2) that Greece's economy will grow by becoming more competitive. While the Greek government has already cut public sector wages, the EU/IMF are not mandating any cuts in private sector wages. One of the ways that a country can make itself more competitive and attractive to foreign capital investment is by reducing private sector wages. In fact, a reduction in private sector wages may have simply been tabled to alleviate any more rioting.
Elsewhere in Europe, France made more headlines when it passed a 100 billion euro austerity package. However, the byline was that the French government assumes that 35% of its austerity package will come from growth. What growth? Europe's GDP this year is probably going to be flat, and the probability of a double dip recession in Europe is growing. Another bubble could perhaps deliver that growth. How could one be engineered?
Trichet's about face last month on whether the ECB would print money by monetizing sovereign debt surprised many. It should be crystal clear to everyone now that the ECB and Bundesbank inflation hawks are no longer calling the monetary shots in Europe.
Printing money is the path Europe has chosen. Because of the level of european sovereign debt and the need for growth, policy makers are choosing to err on the side of inflation in the hopes of preventing deflation.
In the near-term, barring any further negative systemic news, the squeeze could push the Euro all the way up to $1.28. If the Euro quickly climbs to $1.28 look for shorts to return with a vengeance.
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