Euro Crisis Is (Far From) Over
Improving U.S. economic data had recently sparked speculation the Federal Reserve would raise rates sooner than its time frame of late 2014. However, the latest report on U.S. consumer prices eased a hawkish view on interest rates, leading the USD to fall and helping spur the sell-off in bonds.
The Consumer Price Index increased 0.4% after a 0.2% advance in January, as the cost of gasoline spiked, but there was little sign that underlying inflation pressures were building up.
The softer than expected CPI report and weaker University of Michigan CSI proved sufficient enough reason to sell the greenback across the board.
Meanwhile the Greek debt cut worked and the rescue package has gone through. Eurozone finance ministers gave the green light to the €130 billion second rescue package for Greece. It was a pure formality after a satisfyingly large proportion of creditors agreed to a debt cut for Greece.
Perhaps the most significant success of recent days is that even though the debt cut was deemed a credit event, triggering the payment of the financial contracts, hardly anyone seemed to care. CDS (credit default swaps) horror scenario has failed to become reality.
So has Greece been rescued and financial markets been tamed?
Is the euro crisis over?
With their successes in the last few days, eurozone politicians have done little more than bought themselves time. They must use this window to brace themselves for the next wave of the euro crisis which is about to crash down on Europe.
Greece is likely to report the next set of disappointing budget figures in a few months, and the wrangling over a new debt cut and a new rescue package will start shortly afterwards. Maybe the next wave of the crisis will hit us even sooner: Greece is scheduled to hold an election in mid-April which is expected to produce a left-wing majority deeply opposed to the strict austerity program imposed by troika. In addition, Portugal, Spain and Italy must perform the magic trick of stimulating growth while reducing their budget deficits.
“In the event of slower progress in policy implementation, or failure of the economy to respond rapidly enough to reforms, completion of reviews may require additional support from Greece’s European partners on yet more concessional terms than currently envisaged, and-or another restructuring of bonded debt,” IMF said in a report released yesterday. IMF also said “If the program goes off track, Greece’s capacity to meet its obligations to the fund would hinge critically on the willingness of European partners to continue to backstop Greece’s payments capacity and the Eurosystem’s capacity to backstop bank liquidity while further efforts are put in place to stabilize the Greek economy”.
Greece completed the world’s largest sovereign debt restructuring and had to agree to deeper spending cuts to obtain the new funds as it faces a fifth year of recession. The Greek government must continue to meet the conditions set by its international creditors to receive aid payments at three-monthly intervals. Some economists believe that sooner or later a disorderly euro exit is unavoidable.