This week, we saw the euro experience a huge drop across the board due to the disagreement on how to bail Greece out. In one camp, we’ve got Germany and some European Commissioners, and in the other, we’ve got the European Central Bank (ECB).
What Germany wants
According to Germany, they have no plans of giving any more money to a Greek rescue unless private sector gets involved and share the burden and costs associated with the bailout. Jan Kees de Jager, the Dutch finance minister, believes Greek bond holders should foot AT LEAST 30% of the entire bailout bill. The Dutch finance minister wants to “go Dutch?” I didn’t expect that!
Kidding aside, while the details have not been finalized yet, German finance minister Wolfgang Schäuble proposed that the maturity of Greek government bonds be extended by 7 years to give Greece time to fix its finances.
What the ECB wants
The ECB strongly opposed Germany’s proposal. A Greek restructuring will trigger a sovereign debt downgrade and make Greek bonds ineligible as collateral with the ECB. The end result is a collapse of the Greek banking sector, as the Greek government will have a hard time acquiring money to pay its debt obligations.
The ECB instead said that a voluntary rollover of bonds is better. It involves simply asking Greek bond holders in advance for an extension. The ECB thinks that this method will decrease the likelihood of a downgrade. One glaring problem with this is that it does not guarantee a high participation rate.
With Greek bonds branded the worst in the world and considering the events that have transpired in the past few days, a Greek collapse seems more and more certain.
But hey, crazier things have happened in the past, and no matter how wounded a man is, you can’t pronounce him dead until he’s actually… well, dead.
Despite all the negative press the euro has been getting, Barclays, BNP Paribas, and HSBC are all still generally bullish on EUR/USD. Citigroup isn’t as optimistic though, as it predicts that EUR/USD will probably fall to 1.3600 by the end of the year before climbing.