In recent months the euro has ignored a wall of worry about the health of three of its members and moved higher against the dollar, but this is no longer the case according to Jens Nordvig, global head of G-10 currency strategy at Nomura.
The single currency fell heavily on Thursday and Friday last week. First on dovish comments from ECB boss Jean-Claude Trichet then on a report in Der Spiegel that Greece could be forced to leave the euro.
That report was subsequently denied and while Nordvig does not expect a return of the risk premium placed on the euro in January, he is predicting further losses.
“While we do not expect the EUR risk premium to revert to the elevated levels of January, it could pick up somewhat from near-zero at the beginning of May,” Nordvig wrote in a research note.
“The dramatic turn in the euro last week has suddenly made the currency sensitive to 'bad news' again. This follows a few months when it had been strangely immune to both negative data surprises and deterioration in the periphery,” Nordvig added.
“In hindsight, it appears that we were in a mini-bubble during April, when a combination of strong commodity prices and pronounced dollar weakness temporarily dominated other factors in the currency market,” he said.
“European policymakers are likely to continue to try to delay any restructuring as long as they can. We think Greece leaving the euro zone and adopting its own currency would be associated with default in its government debt, a collapse of the Greek banking system, and would probably tip the Greek economy into depression. Consequently this is not an option for the current government.”
Another analyst who backs Nordvig’s view that Greece will not be leaving the euro zone is Marc Chandler, a currency strategist at Brown Brothers Harriman. Chandler believes austerity measures have put the government in Athens between a rock and a hard place and believes restructuring is inevitable.
“The austerity measures that Greece had taken to access the assistance had driven the country into a deep contraction. The more the economy contracts, the lower the tax revenues fall, and the greater the counter-cyclical spending becomes,” said Chandler in a note to clients.
Noting that Greece already had the terms of the first bailout eased, Chandler warns ultimately something will have to be done over the value of Greece’s debts.
“In past debt crisis, these steps to ease the repayment terms by lowering the interest rate and lengthening maturities are often the first line of defense and it rarely succeeds. Ultimately something has been be done to reduce the overall debt level,” he wrote.
“Officials are moving in that direction, albeit slowly. A Greek exit (from the) monetary union remains highly unlikely, but the odds must be recognized above zero.
It is a function of a cost-benefit analysis.
"The cost to Greece would be severe: deep recession, banking crisis, high inflation, a pariah to the international capital markets, and a massive destruction of living standards in Greece.
And yet as the screws tighten on Greece it is experiencing much of these conditions presently,” said Chandler.