With divisions over how to respond to the Greek debt crisis worrying investors, one analyst believes there are considerable short-term risks for the euro.
“The ECB (European Central Bank) remains opposed to any restructuring of debt and its refusal to accept debt that has had its maturity extended would appear to rule that out as an option. To cut off Greek banks from funding would destroy confidence in an instant," Derek Halpenny, European Head of Global Currency Research at Bank of Tokyo-Mitsubishi said in a research note on Monday.
“Our best bet is that the ECB will get its way and the debt crisis will rumble on as Greece is given further aid,” he said.
The most worrying development this weekend in Halpenny’s view is the surge in Italian yields following S&P’s decision to downgrade its outlook for Italian government debt late on Friday.
“With debt-to-GDP of 120 percent, it is crucial for Italy to keep nominal yields low and stable otherwise budget deficits could spiral and investor confidence would plunge,” said Halpenny, who is also worried about the health of the German economy.
“With the Bundesbank eager to point to the probability of German growth slowing, the prospects for the euro zone remain bleak. We are at the current point after booming German growth and without strong growth in Germany, the ability of the periphery to manage current debt levels will be even less likely,” said Halpenny