Introduction
Joseph Trevisani has 20 years of experience in Forex trading and management and is the Chief Market Analyst at FX Solutions. He worked for 12 years as an interbank currency trader, trading desk manager, and proprietary trader at Credit Suisse in New York and Singapore, and at the Bank of Bermuda in Hamilton, Bermuda. He has appeared on CNBC and Fox Business News in New York and CNBC in London and Dubai as a currency analyst and is frequently quoted in the Wall Street Journal, Reuters, Bloomberg, Dow Jones Newswires, the Associated Press, the Chicago Tribune and Futures magazine. He has written economic and currency analysis for Forbes.com, SFO, Active Trader, FX Street, and the Aim Bulletin; his Market Directions column appears on Real Clear Markets, Seeking Alpha, Futures magazine, and other websites. He has a Bachelor’s Degree and Master’s in International Politics and Finance from Columbia University in New York.
There has been plenty of speculation that sovereign debt could trigger the next global financial catastrophe. How concerned are you?
No one could watch the events unfolding in relation to Greek debt without being concerned. The Europeans have bailed out Greece in the short and medium term, which means the Greek government will be able to fund itself for two years. Greek 10-year sovereign debt rates have subsided to 7.82% (as of May 19, 2010), though they are still paying a large premium over German Bunds, 2.76%, the European benchmark.
As part of the deal with the Germans and the International Monetary Fund, the Greek government has had to agree to keep up a very severe austerity program for at least the next three years. There are two problems with this. First, how does any democratic government stay in power while implementing perhaps the fiercest austerity program Europe has seen since the Second World War? Second, austerity programs are no friend to GDP and the Greek economy will find growth extremely hard to come by. This makes it even harder for Greece to pay off its debts.
If you contrast Greece with Ireland, the Irish 10-year bond is around 4.6% (as of May 19), which is significantly higher than German sovereign debt, but nowhere near as penal as Greece. Moreover, Ireland has implemented a serious austerity program that has a certain credibility with the markets. They are not entirely out of trouble, but they are on the right road.
Is the weakness with the eurozone fundamental or something that can be fixed?
It has been said before and it is worth repeating. The fundamental problem with the Maastricht Treaty was that it created a common currency area unsupported by any central fiscal authority. We all understand that that was simply not doable at the time of the Maastricht Treaty and is probably still not doable today, so you have to go with what is possible. At least, that is what the politicians decided to do at Maastricht. They knew it was a weakness, but they did it anyway. This flaw runs through every European institution.
www.qfinance.com