The last few months have witnessed major turmoil as economic issues came up in Greece. Sovereign debt defaults by the EU member countries reduced the appeal of the 16-nation currency i.e. Euro. The currency has slipped more than 5% in this year and markets perceive a further drop in the currency as despite the bailout package offered to Greece by the EU and IMF, other EU members like Portugal, Ireland, Italy and Spain face a similar situation. In this year, the Euro got affected as concerns over the ability of Greece to tackle its deficit led to concerns of sovereign default by the country, reducing faith in the 16-nation common currency. This indicates that the country has been hit hard by a severe downturn and it may take years to solve the sovereign debt issue. On the backdrop of this crisis, markets have become very volatile and investors are now flocking to the US dollar as a safe-haven investment. The EU and the European Central Bank (ECB) is finding ways to deal with this issue.
Greece's budget deficit equals to 12.7% of the Gross Domestic Product (GDP). As per the EU criteria nations must have a budget deficit not exceeding 3%. Rising budget deficits in other EU member countries has raised further concern and dented the outlook for the Euro. This debt crisis could have a widespread effect and impact the other 16-member nations too. The EU is now supporting Greece with a bailout package along with the IMF. After the EU agreed to rescue Greece, market sentiments improved. The EU has decided that it would try rescuing Greece from sovereign default with the help of IMF. However, after Greece, countries like Spain and Portugal face severe deficit issues and this could again trigger concerns in the coming days. This could further revive safe-haven demand for the dollar.
The EU and IMF have announced details of the 45 billion euro financial aid package for Greece. The EU will offer Greece 30 billion Euros in three-year loans in 2010 at 5%. Another 15 billion Euros will be given by the IMF. Another factor that has affected the appeal of the euro is that Fitch has cut its ratings for Greece to BBB- giving it a lowest investment grade, with a negative outlook. This move is surely affecting the economic status of the Euro zone which is currently under pressure to save its economy from further hurdles.
The Greece government faces more than 20 billion Euros in debt redemptions in April and May alone this year. An equal amount would be required toward the end of the year for interest payments and honouring debt-obligations. Last week the government increased its 2009 budget shortfall to 12.9 as against the previous forecast of 12.7 percent. Greece's fiscal deficit is highest in the history of the euro zone since the inception of the common currency in the year 1999.
The country has no ray of hope and has finally advocated strong austerity measures to cut the nations highest deficit. These include lower infrastructural spending, salary cuts for public workers, higher taxes, increase in the retirement ages, etc. These measures are constantly facing opposition from the general public. The austerity measures are also affecting the political scenario as what happens on the government front finally affects the economic scenario. Policies laid by the government become crucial given the current debt laden scenario of a large number of EU members.
The fate of the Euro….
A major question that is worrying the markets is the fate of the Euro amid the debt crisis. Its fate lies on the economic status and scenario in the Euro zone. Since the Euro zone is a set up of 16-member nations which have different economic status, it makes it very difficult for the euro to sustain. Currently, countries like Spain, Portugal, Ireland and Greece are facing a tough time as they debt woes are rising. If the euro zone is unable to tackle this without taking IMF aid further for the other countries then rating will deteriorate and lead to downside pressure on the euro. Amid all this economic uncertainty in the euro zone, the dollar could gain strength as the markets perceive the dollar as a safe-haven amid economic turmoil. Going forward we expect worries in the euro zone to rise as other countries debt woes have to be dealt with. In this scenario we expect the euro to weaken against the dollar. From a long-term perspective too we feel that the global economy is recovering but in this process the euro zone is still dealing with its crisis. If economic data from the US comes on the positive side then we could witness further pressure on the euro. The currency represents the 16- member euro zone and current economic troubles in not one but five member nations is a cause of concern.
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