It looks like this whole Greek bailout mess could FINALLY be coming to an end as euro zone finance ministers approved the €110 billion bailout package for Greece over the weekend. According to the bailout plan, the International Monetary Fund would provide €30 billion while the European Union would supply the rest of the funds.
On top of that, the European Central Bank announced that it would loosen its minimum rating threshold for Greek bonds. Recall that Greek bonds have suffered several downgrades lately, ultimately bringing their rating to junk bond status and rendering them ineligible for ECB purchases. By waving this rating requirement, the ECB would now be able to provide the additional liquidity that Greece needs to pull itself out of debt.
Wait a minute… Didn’t euro zone officials insist that they would NEVER give any special treatment to any of its member nations? Is the ECB in panic mode now? According to ECB President Jean-Claude Trichet, this move is aimed at preventing a full-blown liquidity crisis in the entire region. Would it finally do the trick and completely eliminate debt contagion fears?
Before going into that, let’s take a look on how the EURUSD reacted to all this. I’d say the EURUSD exhibited the classic “buy the rumor, sell the news” case. Look at how the EURUSD rallied furiously last Friday on the speculation that Greece, EU, and the IMF would finally agree on the bailout package. But just yesterday, the EURUSD dropped quickly and reversed all of its gains – and then some – on the news that the deal was finally sealed on Sunday!
This kind of price action is exactly what I expect in the next couple of days. Taking a look at recent action, the EURUSD has been swinging up and down due to bailout news. One day you see the EURUSD soar on bailout rumors, the next you see it fall on downgrade news. Although we may see some short-term euro buying, I still believe that the weak underlying economic fundamentals of the euro zone will continue to put downward pressure on the euro.
By lowering their standards for specific required credit ratings, has the ECB just set precedence on how it would handle future debt problems? You see, even though the ECB said that Greece will be the exception rather than the rule, they have now created a loophole in which other indebted countries could argue for financial aid should they need any.
It’s kinda like raising kids. If you let James hit Jen with a samurai sword, breaking her arm in the process, you can bet your Green Power Ranger that Jen will do the same to Jon and say, “But you let James do it to me!” Now, what happens when Spain and Portugal come knocking on Mr. Trichet’s door in the middle of the night, asking for some money? This may just become a problem down the line.
Then again, what choice did the European Union have? Let Greece burn to the ground? I don’t think so! Not providing any additional help to Greece would spread contagion fears that could eventually undermine the whole euro zone… And nobody really wants that! Seriously, nobody wants that.
For now, it seems like debt concerns have been alleviated, so this could provide some much needed support for the gasping euro. Would it stay this way? We’ll have to wait and see!