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| Sovereign debt crisis reveals cracks in the euro |
Fears that Greece might not be able to meet its debt repayments have resulted in a crisis of confidence in the Euro zone. The risk of the problem spreading to countries such as Spain, Portugal and Italy has triggered a sharp correction in global stock markets.The EU’s response to the crisis was to put together a rescue package with the IMF that could be worth up to £625bn, but it has not been enough to quieten speculation about the future of the single currency. Even the German Chancellor, Angela Merkel, has admitted that the euro is in danger.
Nick Beecroft, senior FX consultant at Saxo Bank, says that he expects the euro to survive the crisis, but thinks it will lose a significant part of its value because of the damage done to its status as an alternative reserve currency to the US dollar. “I think the euro will fall below parity against the dollar sometime this year.”
Greece faces the almost impossible task of cutting its budget deficit from 14% to less than 4% in three years. The public spending reductions to achieve this could well plunge the country into a recession that would make the plan a complete non-starter.
“I think it’s highly probable that Greece will withdraw from the Euro within the next 3 years either because the pain of deficit reduction is just too much, or because the scale of its debts becomes overwhelming,” observes Beecroft. “I estimate there to be a 50% chance that Spain and Portugal will follow suit.”The sovereign debt crisis is also having a major impact on all the other asset classes including the bond and equity markets. Jeremy Batstone-Carr, director of private client research at Charles Stanley, believes it will have long-term consequences, particularly in terms of its effect on economic growth. Because of this he has a bearish outlook and suggests that investors switch into high quality defensive equities or gold.
“Instead of focusing on lagging indicators such as employment or housing data, investors should focus instead on what the bond markets are saying. The low yields are telling us that deflation, not inflation is the real concern,” he says.
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