The EUR returned to a level above 1.3230 after confidence was restored in the 17 country currency by the passing of the Greek bailout. Default is still on the horizon as the terms imposed on Greece are harsh and have drawn criticism from economists who warn that the lessons from Argentina should not be forgotten.
Greece has the difficult task of cutting its deficit from 160 percent of GDP down to 120 percent while in the midst of a recession. It is clear what the EU got out of this deal. Greece is likely to default as the social pressure will be too intense and the proposed tax increases and wage cuts will bring protest to the streets.
The real winners are Italy and Spain which get to decrease their yields as the ECB has bought them time.Ã‚Â Spain’s 10 year bond yield is 5.08 percent down from last year’s high of 6.7 percent . Italy’s 10 year yield is down to 5.4 percent down from 7.1 in December. Will this extra time be used wisely is the question?
Which leads to the uncertain part of the deal. Greece is the first of the so called PIGS to be in this position, not the last. Portugal, Italy and Spain are expected to join if they cannot get their economies in order. But that is easier said than done as proved by Greece. The EU hopes that Greece (the smallest of the PIGS) is the example that the other’s will follow, and worst case scenario will serve as the example of what not implementing austerity measures in the first place will get you.
In Britain Adam Posen and David Miles stood on the wrong side of a 7-2 Bank of England vote to raise stimulus by 75 billion pounds. The 275 billion pound target will get raised by 50 billion to 325 billion pounds.Ã‚Â The reasons given for the lower figure were a more positive outlook on Europe than that at the end of 2011. Not the strongest endorsement after David Cameron’s comments  during Davos.
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