Euro; the worst is yet to come
May 12, 2010
If the thunder is not loud, the peasant forgets to cross
himself.
Russian proverb
I think it is a given that Greece will have to default,
everyone knows this, but they are just playing cat and mouse
for now. Most Greeks are dead set against the new Austerity
measures and they will likely throw this government out of
power for the new changes they have instilled. The next
government will cater to the people’s needs for fear of
receiving the same treatment. Change is not wanted in
Greece. The only way to fix this problem is if the nation as
a whole understands that they have to go through a painful
period of cuts, but as evidenced from the past riots this is
not the case. The story below further substantiates our
claims.
Greek unions announced on Wednesday that they would stage a
24-hour nationwide strike on May 20, the second major
protest against tough austerity measures pledged in exchange
for billions of euros in aid. The main public and private
sector led a 50,000-strong march a week ago in which
hundreds of angry Greeks fought pitched battles with police
in the streets of central Athens and three people were
killed in a petrol bomb attack on a local bank.
They are due to march in the capital on Wednesday from 6
p.m. (1500 GMT), in a rally which will give indications
about the public mood before the big walkout next week.
Investors are closely watching public reaction to government
wage and pension cuts amid concerns broader unrest could hit
Prime Minister George Papandreou’s resolve in pushing them
through. New figures published on Wednesday showed Greece’s
economy contracted 0.8 percent in the first quarter compared
to the last three months of 2009.
The austerity measures, pledged in return for 110 billion
euros ($139.7 billion) in emergency aid from the European
Union and International Monetary Fund, are expected to keep
the economy in recession through 2011."The IMF will not
stop thirsting for workers’ blood," said Yannis
Panagopoulos, chairman of Greece’s main private sector labor
union GSEE. "Its recipes are a disaster and the government
must turn them down."
The country’s socialist government on Monday unveiled a
draft law to raise the average retirement age and cuts
benefits, which further angered unions already opposed to
previous steps including public wage cuts and tax hikes.
Full story
Adding to the host of problems is the fact that Greece is
now officially in a recession. Painful cuts have to be
implemented and maintained or Greece will default. Sometimes
markets should be allowed to settle matters, intervention
only delays the inevitable. Our stance has been that the
Euro is going to trade down to the 115 ranges and could
possibly trade down to the 110 ranges. The massive 1
trillion Package had no lasting impact on the Euro, after
mounting a brief rally, the Euro crumbled and is now on its
way to putting in another series of new lows.
Spain’s new austerity measures, too little too late
Prime Minister Jose Luis Rodriguez Zapatero said Madrid
would slash civil service pay by 5 percent this year, freeze
it in 2011, cut investment spending and pensions and axe
13,000 public sector jobs in a drive to meet EU deficit
targets.
"We have to make a singular, exceptional and
extraordinary effort to reduce our public deficit and we
have to do it when the economy is starting to recover," he
told parliament. The announcement came two days after euro
zone governments, the European Central Bank and the IMF
agreed on a $1 trillion (674 billion pound) rescue package
to stabilise the euro in exchange for pledges by highly
indebted countries to pare down their deficits.
Full story
We think this is action is a little late as Spain had ample
time to address these difficult changes, but instead decided
to sit on its fat rear and do nothing. The current
recommendations are just too little to produce any
meaningful change. Unofficially the employment rate is well
past 20%, the housing sector has crashed, fiscal debt is
roughly 112% of GDP and Rising and estimates put private
debt between 160-180% of GDP. Thus unless they put forth
some bone crushing changes, the odds are that Spain will be
joining the Greeks sooner than later. Furthermore, this 1
trillion euro aid package is more of a band aid than a fix
because the nations that are spending beyond their means are
still doing so. Nothing has changed other than the day of
reckoning.
Financial markets are showing they have their doubts, with
markets in Europe and Asian drifting lower Wednesday after
Monday's initial euphoria over the initial 750 billion euro
package announced by European Union officials over the
weekend."Is the package big enough?" asked Paul Lambert, the
current director of currency and macro strategies at Polar
Capital who's also held roles at Deutsche Asset Management,
UBS, Citibank and the Bank of England. "That depends on the
success of the debt consolidation in the periphery [and]
whether they're ultimately able to have falling real wages
so that they can come back in line with the core."
Much criticism has been lobbed at places such as Greece for
high public sector wages, which will now be brought down
sharply by the government as part of the agreement for its
bailout package. That's also been one of the key reasons
Greeks have taken to the streets over weeks that have turned
violent at times. On Wednesday, Spain announced a plan to
reduce public wages 5% this year and freeze them in 2011
while suspending a pension hike. The moves come as the
government there fears being dragged into a situation
similar to Greece's.
"I've observed that if any country in the emerging markets
had been offered a loan package like the Greeks were offered
before they got the eventual loan package they got, people
wouldn't have been rioting on the streets, they would have
been saying thank you," said Lambert at a Morningstar
Investment Conference in London.
"The fact they're rioting on the streets means ultimately
there may not be the ability of the Greeks to see a 20% fall
in real wages," he said.
Full Story=
Yeah
we would like to see how long individuals are willing to
keep quiet once the government starts to cut their salaries,
increase taxes and cut benefits. People used to the good
life do not take kindly to such measures, they are going to
get rid of the existing government, (Greece is the lead
candidate for such a move) and replace it with one that is
more sympathetic to their cause. The only way to solve this properly (instead of the miserable program called
shock and awe,
more like shock and shake) is for the Euro zone to set
an example. They need to let one country default; this will
send a strong message to the others that if they don’t wake
up, a sledge hammer is going to fall right on their heads
and snap them out of their coma.
In the short term this is a very painful strategy, but long
term this would be very beneficial to the Euro, as it would
give it credibility and make it a true front runner as a
challenger to the US dollar. Investor will have more faith
in a nation that is willing to take strong measures to
protect its currency.
The enemy of my enemy is my friend.
Arabian Proverb
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