Markets Fret About Euro 'Slow-Motion Car Crash'
Reports that Greece has not met any of the fiscal targets set by the International Monetary Fund (IMF) and the European Union (EU) as part of its 110 billion euros ($157 billion) bailout knocked down the euro Monday, as other countries in the euro zone are threatened with being dragged into the Greek morass.
The IMF could withhold its portion of June’s 12 billion euros payment unless Athens can prove it can meet all its financing requirements for the next 12 months.
“It’s high noon again in Europe and the gun is to Greece’s head,” Jan Randolph, Director of Sovereign Risk, IHS Global Insight, told CNBC.com. “The single biggest issue is: Are they going to get the funding?”
A report in the Financial Times suggested that revised plans for Greece’s bailout could include incentivizing private bondholders to extend repayment schedules, which could take some of the pressure off Greece.
But this was unlikely to calm market jitters and whether Greece defaulted or not still rests on the shoulders of Greece’s creditors, according to Randolph.
“It’s not up to the ratings agencies to decide if they’re defaulted, but their creditors. It’s Greece’s choice to join Europe properly once and for all, and any foot-dragging or missing of targets is going to create huge anxiety in their creditor governments, including Berlin,” he said.
“In terms of the classic risk-on, risk-off, we know what the risky and safe haven assets are,” Randolph said.
Italy Is Not Greece
Trading was thin in Europe Monday, with London closed for a bank holiday and New York also closed due to Memorial Day. Spreads on Italian 10-year bonds widened Monday as the country is trying to raise up to 8.5 billion euro ($12.1 billion) from the markets, according to Dow Jones.
Federico Ghizzoni, chief executive of Unicredit, told CNBC that Italy is in a totally different position than Greece and that for Greece it is too late to restructure the debt.
However, the market is not paying enough attention to the “hugely positive” growth in Germany, Randolph said.
There were fears that the euro will sink further against the dollar this week. The single currency finished last week up against the dollar after briefly trading under the $1.40 level on Monday, but the prognosis for the single currency still looks challenging.
“Europe’s debt crisis remains a slow-motion car crash. If sovereign wealth funds did not remain so determined to diversify out of dollars, the euro would surely be much lower,” Simon Smith, chief economist at FXPro, wrote in a research note.
“The news out of Greece over the weekend was not reassuring, so there is certainly the potential for further weakness once markets return to normal tomorrow," Smith said.
“Moreover, it is evident that the contagion from Greece’s precarious financial predicament is spreading more widely through Europe,” Smith added.
“The major rating agencies have recently been downgrading those European banks with significant Greek bond exposure, which will of course increase their cost of funding,” he pointed out.