The Euro fell to a 12-month low against the Dollar today as there is considerable doubt in the market that Greece will be ale to carry out the harsh austerity measures required of it by the aid package. Moody's said that the EU/IMF rescue package would not end the Greek crisis, but instead how it is able to adjust its budget deficit in line with targets will be the key to success. So far the markets are hesitant to bet that the Greek government will be able to meet those obligations.
This is a big shift from yesterday, at least in NY trading, as the aid deal had seemed to put aside the concerns over Greece with the S&P 500 index scoring its strongest daily gain in two months and Treasuries losing their safe haven allure. In Europe the view was much different, with the view that the crisis was far from over.
Conditions attached to the 110 billion euro in loans are tougher than those Greece was discussing with the Eurogroup in that there is front-loaded reduction in the budget deficit equivalent to 11% of GDP over a three-year period. The monitoring arrangements are tough as disbursement will depend on Greece satisfying the IMF and EU, on a quarterly basis, that its budget-cutting plans are on track.
There was also no restructuring of Greece's debt, which would be the normal case in a bailout using the IMF. When asking for a bailout from the IMF and taking on the austerity measures its is implied that a nation will not be able to meet those requirements without some relief from their debt financing burdens.
Some form of debt restructuring for Greece would have hurt the balance sheets of banks in the Euro-zone and was not considered. Fears were that there would be a flight of capital from other peripheral Euro-zone nations as investors attempt to avoid taking a haircut on their securities. The problem is that without the restructuring the obligations by the Greek government and people will remain high even if they are able to cut their budget deficit to the targets. Greece's creditors meanwhile will not shoulder any of the burden of their poor investment. Anxiety about how the Greek public will react to the implementation of budget cuts were on display as there was an ongoing general strike, while the German public will make its voice heard about its 20 billion euro tab in the bailout known in an upcoming regional election.
The ECB however, sensing the trap that Greece is in, has said that it will take junk-rated Greek government securities as collateral meaning they will be picking up the risk in order for Greece to be able to take out loans with the central bank.
The solvency issue for Greece may not be resolved with the aid package as Greek capital requirements to 2012 are greater than the size of the bailout package. While the Greek finance minister has said the package was large enough to protect his country from market exposure in 2010, 2011, and 2012, the German Economy Minister is stressing that the bail-put is not intended to cover Greece's entire financial requirements for the next three years.
The biggest fear now is contagion and that the markets will turn to the other highly indebted nations within the Euro-zone like Portugal and Spain and begin driving up their borrowing costs adding similar pressure as Greece faced to their attempts to reign in their deficits.