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Euro Will Weaken the Longer Greek Crisis Drags On

By    |   Wednesday, 10 Mar 2010 02:23 PM

Talking about weird statements, here we have a good one.

Romano Prodi, a former European Commission president from 1999 to 2004, said that “for Greece, the problem is completely over.”

The former Italian prime minister also said Wednesday in Shanghai that he doesn’t see “any other case now in Europe. I don’t think there is any reason to think the euro system will collapse or will suffer greatly because of Greece.”

Of course, for now, investors don’t seem — and with good reason — to share Prodi’s exuberant optimism.

By the way, Athens must redeem some 22 billion euros ($29.92 billion) of bonds in April and May. Also, 10-year Greek debt yields have eased some 88 basis points from a record in January of 396 basis points over its German bund counterpart, but are still more than four times the level where they were two years ago.

The key question for Greece remains whether or not it can battle its way through the current crisis without necessarily resorting to outside assistance.

Greek government officials are saying Greece may formally seek European Union financial aid if its borrowing costs don't fall sharply in six to eight weeks. If EU aid doesn't happen, Greece will be obliged to seek rescue from the IMF.

“The high premium now for Greek bonds is ‘simply unsustainable,’” Dow Jones quoted an unnamed Greek official as saying.

“For the spreads to narrow, we need some kind of guarantee for our bonds from our European partners … if they don't give it to us and the spreads continue to be so wide, we will likely publicly ask for economic assistance and if there is no response, there will be no other choice but to turn to the IMF.”

The actual Greek problems were factually confirmed by Greek Debt Management Agency Chief Petros Christodoulou when he said: “We are not looking to issue soon … There is no decision regarding new issues.”

Now, it’s also becoming clear that Germany has backed down on an alleged agreement to offer guarantees to buyers of Greek debt in return for fresh austerity measures out of Athens.

Keep in mind that Angela Merkel only welcomed Greece’s new measures as an “important step” without offering any of the widely hoped for support.

Despite German Finance Minister Wolfgang Schäuble’s apparent enthusiasm for an European Monetary Fund (EMF), it now also seems that interest for an EMF is rather thinly spread among senior officials both in Germany and elsewhere among euro zone members.

Setting up an European Monetary Fund would also require European Treaty changes, which is easier said than the done.

Meanwhile, German bankers have taken a far more negative spin than Prodi.

European Central Bank Executive Board Member Jürgen Stark warned on Monday in a speech in the United States that “there is a rising risk that the financial and economic crisis will be followed or exacerbated by a sovereign debt crisis … a return to sound and sustainable fiscal positions is a key responsibility that has yet to be addressed.”

Bundesbank President and ECB member Axel Weber said: “Any discussion about bailouts is completely counterproductive, Greece has to concentrate on implementing its budget reform plans … the no-bailout clause is a central part of the European Union framework … It’s not helpful to talk about ways to institutionalize help when the question is how to implement the budget reforms.”

Besides all that, it also seems interesting to me that part of France's reluctance to give the idea of a European Monetary Fund high priority is that in France they seem to be rather happy to see a weaker euro as a result of the developing political deadlock on Greece.

In this context, it certainly shouldn't come as a surprise to hear French Finance Minister Christine Lagarde arguing yesterday that a weak euro “makes investing in France more attractive to foreign investors.”

I think we will hear continuously similar declarations in the near future.

One thing is for sure; we aren’t at the beginning of the end of Greece’s crisis and the euro zone drama.

A further weakening of the euro is completely in the cards.

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Talking about weird statements, here we have a good one. Romano Prodi, a former European Commission president from 1999 to 2004, said that for Greece, the problem is completely over. The former Italian prime minister also said Wednesday in Shanghai that he doesn t see...
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2010-23-10
Wednesday, 10 Mar 2010 02:23 PM
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