Euro struggling with its own Greek tragedy

As soon as President Papandreou won the elections in October 2009, the Greek government hurried to raise the 2009 deficit estimation to more than 12% from a previous forecast of 3.7%. Obviously, this was not due to a 'rounding error'. It is no wonder that investors doubted the reliability of these statistics.

The EU is seeing itself being forced to put itself in the driver's seat and to (partly) take control. European Central Bank (ECB) President Jean-Claude Trichet boldly stated that the ECB is "confident" that Greece will cut its deficit below the 3%-limit of gross domestic product in 2012. After the meeting of the G-7 French Finance Minister Lagarde commented that "...the European members of the G-7 will make sure it is managed..."

Despite these 'tranquilizing' words from the politicians, (negative) developments at the government debt market show that investors do not to have that much faith. Risk aversion concerning Greek debt, recently drove the premium that investors demand to hold Greek 10-year bonds, to the highest level since the year before the euro's debut in 1999.

The sovereign credit default swaps (cost of insuring against default e.g. of a country) dramatically spiked in the last months. For instance: the five-year CDS's of Greece, rose from 100 basis points (May 2009) to at least 400 basis points a few days ago. Other countries under attack are Portugal, Italy, Ireland and Spain, which form, together with Greece, the 'PIIGS' of the euro zone. These countries are struggling with the same identical problems: a sluggish economy and huge deficits.

Deficit fears

Concern that Greece and other European nations may fail in controlling huge deficits has pushed the euro future down nearly 10% (after hitting a high of $1.51 in the final months of 2009, to a low of $1.36 in February). The euro (continuous) future is currently trading around a level of $1.37. The slumping euro, which has edged towards the lowest point in 8.5 months, also dragged commodity prices (including metals and oil) down.

It can be doubted whether the European currency will recover from its own 'Greek tragedy' soon. The EU is situated in a kind of 'catch 22' situation. A bailout of Greece may prompt other European Union nations to ask for aid. If EU-leaders choose this path, this will mean that richer nations (such as Germany and The Netherlands) will eventually pay the bill).

On the other hand, if Greece is be forced to pull out of the Union and eventually default, this might be the starting signal of a further deterioration of the 'strong' euro zone with other weak countries logically following suit.

In other words, the European Union is facing a challenge to neutralise the (potential) damage of the 'Trojan horses'. The adage 'put the money where your mouth is' can be applied to Europe's politicians like never before. Only if the euro is able to gather strength again and to maintain its solid status, might we conclude that the politicians have succeeded.

The EU leaders (and the European Central Bank) are to gather for an informal meeting. The price development of the second most important currency in the world will show us whether the actions taken are going to be effective.