Euro Zone Debt Crisis Prompts Action from Leaders

It’s hard to believe that it’s been almost two years since Greek deficit problems started. But unlike Big Pippin‘s favorite series Entourage, the Greek debt drama could be in for a whole new season. Just last week, fresh concerns about Greece’s debt surfaced all over again when economic and financial hotshots in Europe started entertaining the possibility of Greece defaulting, or worse, leaving the euro zone. Duhn duhn duhn.

Although German Chancellor Angela Merkel remains determined to avoid both scenarios, many believe that Germany cannot hold the fort alone. Not even the Germans themselves are gung-ho about helping Greece deal with its debt, as they disapproved of paying for their neighbor’s mistakes with their taxes.

Greece

It doesn’t help that Greece needs to pay a huge chunk of its debt obligations next month and they still don’t have enough cash in their pockets to do so. Unless they come up with a way to pay up in the next few weeks, talks of debt contagion in the region might grow worse. After all, other nations in the euro zone, debt-ridden or otherwise, have started to show signs of vulnerability to the debt mess.

For instance, French banks’ exposure to Greek and Italian debt already took its toll on their share prices last week. Debt rating agency Moody’s even warned that it could downgrade three French banks despite their assurance that they could stay on top of the situation.

Meanwhile, the recent Italian bond auction revealed that investors are also gravely concerned about Italy’s finances. Demand for the bonds was considerably lower with bond yields jumping from 4.3% in July to 5.6% in August, indicating that investors are less confident that the Italian government could repay its debt.

Of course, most market participants were alarmed by this bad news, thinking that Spain’s upcoming bond auctions could suffer the same fate. Amidst this, Merkel announced that she would talk things over with French President Sarkozy and Greek Prime Minister Papandreou.

If Merkel’s little group chat isn’t enough to calm investors, then maybe participation of the U.S. will do the trick. Word on the street is that President Obama is sending his home boy Treasury Secretary Tim Geithner to the informal EcoFin meeting of the EU leaders in Poland this Friday.

Though the White House revealed that there isn’t any agenda planned for Geithner on Friday, many expect him to call for more concrete actions from the leaders. Still, don’t expect him to hog the spotlight. It’s his first EcoFin meeting after all.

Another one of the trending topics among the forex tweeps yesterday was that the Italian government was in talks with China Investment Corp. about purchasing Italian bonds. While that rumor eventually lost steam, Guido Mantega, Brazil’s finance minister did reveal that the finance ministers and central bank governors of the BRIC nations and South Africa will have their own meeting in Washington this September 22 where they will talk about possible actions to help the euro zone.

BRIC

Judging by yesterday’s price action, it seems that the succession of positive speeches from political and financial leaders helped alleviate market fears. EUR/USD snuck in a 30-pip gain, while EUR/JPY recouped most of its intraday losses to finish only 32 pips down.

But then again we could only be seeing a covering of last week’s short trades. Investors might be wary on which direction to take with all the mixed rhetoric and are simply choosing to stay out. In fact, many analysts are saying that the euro zone leaders might as well throw in the towel and let Greece default as it is no longer a question of “if” but rather a matter of “when” the country is defaulting.

In any case, make sure you stay glued to the tube for the next reports or rumors that might be hitting the markets’ way! If bullish speeches from market leaders continue to prop up the euro, then we might see the common currency gain more momentum in the charts. But if markets go back to pricing in a Greek bailout, then be ready with your short trades!