The EUR returned to a level above 1.3230 after confidence was
restored in the 17 country currency by the passing of the Greek bailout.
Default is still on the horizon as
the terms imposed on Greece are harsh and have drawn criticism from
economists who warn that the lessons from Argentina should not be
forgotten.
Greece has the difficult task of cutting its deficit from 160 percent
of GDP down to 120 percent while in the midst of a recession. It is
clear what the EU got out of this deal. Greece is likely to default as
the social pressure will be too intense and the proposed tax increases
and wage cuts will bring protest to the streets.
The real winners are Italy and Spain which get to decrease their
yields as the ECB has bought them time. Spain’s 10 year bond yield is
5.08 percent down from last year’s high of 6.7 percent . Italy’s 10 year
yield is down to 5.4 percent down from 7.1 in December. Will this extra
time be used wisely is the question?
Which leads to the uncertain part of the deal. Greece is the first of
the so called PIGS to be in this position, not the last. Portugal,
Italy and Spain are expected to join if they cannot get their economies
in order. But that is easier said than done as proved by Greece. The EU
hopes that Greece (the smallest of the PIGS) is the example that the
other’s will follow, and worst case scenario will serve as the example
of what not implementing austerity measures in the first place will get
you.
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