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Euro Zone

Essay by   •  September 2, 2011  •  Essay  •  497 Words (2 Pages)  •  1,829 Views

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European Union leaders may have bought the euro some time but they haven't brought it a solution.

The single currency may well have a comfortable summer. After many months of market tension, politicians as well as markets players will be only too glad to head for the beaches now that a second bail out for Greece has finally been negotiated.

But, come the autumn, the real test of the €159 billion bailout that the leaders have just cobbled together for Greece will take place.

The details of private sector involvement, the reaction of credit rating agencies, the impact on the borrowing costs of other peripheral euro zone debtors should all be a lot clearer by then.

And investors will probably not like what they see.

Greece won't be any happier accepting austerity measures linked to the rescue package and the fiscal independence of euro zone members that led to the debt crisis in the first place will be as strong as ever.

There is little doubt that EU leaders have removed the immediate risk of debtor default that has been haunting the market for so long. Their agreement to expand the public sector contribution to Greece as well as rope in private sector lenders has certainly improved the chances that Athens will be able to resolve its debt issues in the longer-term.

The relief over the last-minute deal has been expressed right across global markets with bond prices falling, stock markets rallying, the cost of peripheral debt tumbling and the euro itself rising by about 2% against the dollar. The reaction, however, can hardly be described as euphoric. It is more a case of markets giving the deal the benefit of the doubt.

Just look at the euro. It may have rallied to a high of nearly $1.4450 after the package was announced in Brussels but this didn't even put the currency in the upper end of the $1.3837-$1.4940 trading range that has existed for the last few months.

It hardly looks as if euro bulls are getting carried away.

Of course, the euro's performance is very much a matter of degree. Short positioning in the currency hasn't been that high and a reminder this week of the economic problems facing even the core countries in the euro zone may well have tempered enthusiasm.

Friday's sharp fall in Germany's Ifo survey of business sentiment may even have cast doubt over whether the European Central Bank's decision to raise interest rates earlier this month was such a good idea.

Some analysts suggest that as the summer lull gains pace and trading levels decline, there is a chance that the single currency will drift up to the top of the trading range.

But, even if that happens, it will only be a matter of time before reality over the deal kicks back in.

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