EuroZone Sovereign Debt Problems In Headlines Again
Tue, Sep 7, 10:51 AM ET, by ForexTraders.com
For several months we have been warning of a potential collapse in the EuroZone that could unravel this fall as a result of sovereign debt problems resurfacing in the EuroZone. On Monday, the sovereign debt problems in the EuroZone were again in the headlines due in large part to the fact that struggling countries such as Greece, Portugal, Ireland, and Spain are facing increasing yield spreads as they attempt to finance their huge deficits.
The yield spread between German debt and Greece debt is a big concern at the moment. The current yield spread is reaching levels it has not been at since the height of the debt crisis in May. As of Sept. 3, the yield on 10 year Greek bonds was 11.28% compared with 2.34% on German bonds. This yield spread is the widest we have seen since May. This is a very bad sign for the EuroZone. Currently, Greece is instituting huge austerity measures by making massive cuts in public spending. These massive cuts are of course being met with major resistance among Greek citizens. In fact, many economists are concerned that further austerity measures in Greece, Portugal, and Spain could result in major backlash including major riots and protests, which will only serve to make things more difficult in Greece.
Now, if you combine this disturbing domestic scene with very high financing costs you get an ugly overall economic picture in Greece. When interest rates get as high as they are right now in Greece, it makes it very difficult if not impossible to finance debt. Why Trichet Wants Austerity MeasuresThe primary reason European Central Bank President Jean-Claude Trichet has called for austerity measures across the EuroZone is to restore investor confidence in EuroZone countries. He believe that if Greece and other struggling countries committed to slashing deficits, then investors would respond by putting confidence in the EuroZone recovery, which would then result in investors demanding much lower interest rates. However, that is not happening. Instead, investors are demanding very high interest rates. This is a major problem. If Greece cannot remain competitive by raising funds in capital markets, how will it finance its debts? Well, it cannot borrow from the ECB and IMF forever. This leads to a big problem.
On Monday Morning, PIMCO fund manager, Andrew Bosomworth stated, "Greece is insolvent. I see it as being quite a substantial risk that Greece eventually defaults or restructures." PIMCO is one of the largest funds in the world with hundreds of billions of dollars under management. This dreary outlook for the Greek economy has weighed heavily on the euro during Monday trading. The euro formed a head and shoulders pattern on the M15 Monday before falling sharply during the Asian session.
Once the euro broke key intraday support at the 1.2870 level, price fell very sharp all the way down to 1.2800. This makes for yet another failed run at the 1.2900 area. The EUR/USD has now failed at that level several times.
This sharp rejection of the 1.2900 level could lead the euro to retest the lows down at 1.2600 by mid-week if the bearish tone gains strength.
September tends to be a very volatile month in financial markets as traders return from summer vacation and trading volumes pick back up. Currently, it appears that bearish sentiment is building up for the euro. There will need to be a major break of bullish news this week if the euro is going to be able to make a serious run at the 1.2900 level and hope to break above it with any conviction.
SDI Glossary: "price" Definition
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