Greece continued to be the focus of attention at the Eurofin finance ministers meeting in Brussels as officials grappled with an array of policy choices to solve Greece’s mounting fiscal problems. Although the country has pledged to assume tough austerity measures to control its widening deficit, there is growing doubt that Greece can tackle these issues alone given the spotty accounting of its finances.
Although European monetary officials have vehemently denied the possibility of any rescue package, European finance ministers have started to explore that option. One critical barrier to any outright loan package to Greece is the fact that the European Central Bank does not carry a mandate as a lender of last resort and is therefore unable to provide direct assistance to Greece. Last week ECB Chief Jean Claude Trichet was adamant that the central bank would not be able to relax its rules on collateral indicating that Greek sovereign will not be accepted if its rating fall below investment grade.
With the European commission budget simply too small to offer Greece any meaningful restructuring deal, attention is turning to the possibility of the IMF as the institutional instrument of choice to restructure Greek finances. Although Greece comprises only 3% of the EZ GDP and therefore the threat of its exit from the union would have little economic impact, it is being watched by the market as a test case solution for the broader based fiscal problems of other Southern European economies such as Spain, Portugal and even Italy.
The euro has been hobbled by these issues for the past several sessions as the pair remains capped at the 1.4400 level for now. We continue to believe that the unit could trade heavy for the rest of the week unless it receives a boost from better than expected economic data. Today’s ZEW survey will provide the first glimpse of investor sentiment in the region, but the true marquee event f the week will be this Thursday’s January flash PMI data for both the manufacturing and services sectors.. Aside from the fiscal problems dogging the region, the euro has been weakened by market concerns that the economic recovery in the 16 member region is beginning to stall and this week economic releases could provide further proof to that bearish thesis.
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