Greek Drama Turns Into Crisis of Confidence

Tuesday, 11 May 2010 04:25 PM

By Hans Parisis

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Regarding Europe, one thing is for sure: Confidence is not back!

After this weekend's nearly $1 trillion European/IMF rescue package (which, in my opinion, is primarily aimed to rescue French, German, and all the other banks — and to a much lesser extent the "Club Med" countries, plus Ireland), it now becomes clear that the package is failing to convincingly detract investors from the real euro tail-risk scenario.

Yes, nothing fundamentally changed in the euro zone except that we have a new situation whereby the “rulers” will try to give a temporary solution to irresponsible debtors with more irresponsible credits.

Therefore, at least in my opinion, the bias in terms of longer-term trend with the euro/dollar is still heading down to the $1.15 to $1.20 by late summer.

In the meantime, the world has learned that the euro zone is a monetary union that looks hopelessly compromised by real divergences that will give long-term players, notably foreign central banks and sovereign wealth funds, pause for thought when considering reserve alternatives to the U.S. dollar.

The front-loading of euro fiscal austerity among periphery countries that are fast losing their fiscal sovereignty points to the “lower EU rates for longer” story.

We can say that the euro’s downside path is definitively in place.

I’m not saying it’s going to collapse but as things are being constructed, there is no stronger euro in the cards, at least not in the foreseeable future.

That said, and from a global perspective, we also must say the rescue package provides much-needed breathing room for all these countries that have transgressed on fiscal matters. The nearly $1 trillion plan should give them more time to get their houses in order.

To that extent, we now have a positive story for risk, relative to where we were last Friday.

Nevertheless, Germany's opposition Social Democrat Thomas Oppermann said had not decided whether to support the European rescue package for the euro. He warned that the country could end up footing the entire cost of the bill.

Also, the German opposition Greens said on Monday the plan was unlikely to come to a parliamentary vote before June.

The make-up of the German upper house (Bundesrat) is still unclear after Chancellor Merkel's coalition lost its “automatic” majority in the extremely important elections in North Rhine-Westphalia.

Germany's biggest selling daily, “Bild” said on its front page: “We are Europe's fools again!”

That should give us an idea of how many Germans think about the rescue package and what kind of troubles are in the making.

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