The Euro has stabilized overnight. We are still looking atvery low prices, but not seeing the hard selling pressure like we have seen.Just because the Euro is taking a breather doesn’t mean that the problems aregoing away at this time.
The Euro has stabilized overnight. We are still looking atvery low prices, but not seeing the hard selling pressure like we have seen.Just because the Euro is taking a breather doesn’t mean that the problems aregoing away at this time. The Euro is expected to continue to face tremendousselling pressure as the sovereign debt problems move from country to region toglobe. Restructure, cheap loans.
One of the most serious issues facing the Euro is the lackof clarity and support from the European Central Bank. As stated several timesbefore, the Euro Zone is a unique organization and the Euro a unique currency.The EZ is a made up of countries using one currency but keeping separatebalance sheets. Although it is a union of countries, the current problems haveexposed the fact that there is not much unity. It is currently made up of acombination of wealthy countries and not so wealthy countries. With theEuropean Central Bank calling the shots on interest rates, the individualcountries are expected to take care of its own balance sheets.
The current problems in the Euro Zone are showing theworld’s financial markets what can happen when contaminated loans on thecountry level can spread to an economic region then eventually to the globe. Itseems the only way to deal with this situation is to find a centralorganization that is at the pulse of the problem and has the means to attemptto fix it. This organization is the European Central Bank.
The ECB in my opinion has to act quickly and decisively atthis time to stem the spread of the sovereign debt issues in its own backyard,the Euro Zone. The past two weeks demonstrate that just throwing money at theproblem is not going to help this time. The ECB has to first restructure Greece’s loans,and secondly it has to make cheap loans available. This means it has to lendmoney at zero percent interest. Finally, the central bank has to start showingits support for Greeceby purchasing its sovereign debt.
On Thursday, Jean Claude Trichet said that Greece will notdefault on its debt. Based on the trading action, it became clear throughoutthe day that no one believed him. For several weeks, traders have been askingfor clarity. Yesterday’s plunge clearly demonstrated that mere words were notgoing to be enough to instill confidence into the Euro. Investors want to seeaggressive action. They want to see that the ECB has a grasp of the situationand is willing to make aggressive moves to ensure that stability of thecurrency.
If the ECB doesn’t act fast, then look for the fear to movefrom the Euro Zone to the U.K.and Japan.Although U.S.banks no doubt have exposure to Euro Zone contaminated debt at this time, theramifications are expected to worsen if something isn’t done right now to calmthe situation.