Actually, doomed might be too strong a word to use. Let’s just put it this way and say that the common currency is headed for another serious decline, most likely to the lower 1.20’s if not below that.
There’s no end to the debt crisis, no matter what government officials say. The market has put its stamp of disapproval on the situation, which basically means it has little if any faith in the future of Greece as a functioning economic entity capable of handling its own finances. In essence, Greece is just another bad credit risk, a borrower with a credit score below 500.
Greece’s benchmark 10-year bond yields rose to 8.56% by Thursday morning, the most since 1998 and more than double the rate on comparable German debt. Since April 12, the day after the EU said it would provide a backstop by offering 3 year loans at 5%, Greece’s 10-year government bond has surged more than 100 basis points. What that tells you is that the market has little faith in this solution in that it doesn’t solve the essential problem; Greece will never be able to generate enough income to pay down its burgeoning debt. The only thing it can do is to cut spending, which, can only go so far.
Think of it this way. Would you lend to a borrower deemed as a bad credit risk if all you had were promises that it would cut back on spending for things like gasoline and food? This is what austerity means to the average Greek citizen on the street-less money for essentials. The population is so angry about the situation; they’re striking at hospitals and airports (which truly is a case of cutting off one’s nose to spite its face if there ever was one).
What is a nation in economic terms but another “store” on a street called “the world”. The only way it can generate income is by producing products it can trade or by charging admission to people who wish to tour its interior. The problem is that Greece produces basically nothing and while there always will be people willing to spend in order to view its beauty, a national economy cannot survive on tourism alone.
The only option left to Greece is to allow itself to come under the control of the IMF, which is basically what a bailout entails; as a new creditor, the IMF gets to write the rules regarding how the government will operate in terms of all things fiscal.
In any event the Germans are certainly getting exactly what they want, which is to be off the hook for covering Greek debt and a depreciating euro. Actually, the entire area needs to have a serious devaluation of its currency in order to make its exports of cars, high-tech machines, chemicals, etc. more competitive. Stores called “Germany”, “France” and, to a lesser extent, “Italy”, have the products that people with money (Asians) want.
So, look for the euro to head down towards $1.20 as the year progresses, a trend that will be accelerated once China allows the yuan to appreciate at some point in the not too distant future.
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