Despite all the efforts the EU still cannot resolve its economic and debt problems. According to the West European Association of Traders and Investors under , the main components of the crisis are the following:
1. A real threat that Greece may default on its debt
2. Some other EU states with sick economies are looking for constant financial aid.
3. The Stabilization Fund cannot help every EU country in need (the money is not enough).
4. Constant inflation growth in the Euro-zone
5. The decline of the European stock indexes.
If to consider every single item one by one, the overall picture is far from being favorable.
Greece is on an economic “knife-edge”
Cruel as it may sound, but this is the real state of affairs:
· Few people still believe that Greece will manage to avoid a default. Even the Greek Prime Minister doesn’t exclude such a scenario.
· The country’s external debt has already exceeded €330B. This year it is expected to reach 160% of the national GDP.
· Most investors seriously question Greece’s ability to service its debts. The pace of the budget deficit reduction doesn’t look reassuring. The government has only managed to reduce the deficit by 1%.
· All that the government can offer its lenders and people is big-scale privatization and tough austerity measures.
· In May 2010 the EU and the IMF lent to Athens € 110B. It was expected that by 2012 Greece would completely have restored investors’ confidence. However now it seems unlikely. According to the experts from the UK-based investment Legal & General, the situation around Greece’s debt liabilities remains unclear and tense.
· Flitch rating agency decreased the country’s credit rating from «ВВ+» down to «В+», adding rather negative comments.
The default of Greece may provoke the “domino effect”
The most dangerous thing is that some other European countries may follow the Greek example. This is a threat to the entire Euro-zone. If a couple of Euro-zone states default on their sovereign debts the Euro-zone will probably be disintegrated.
Now there are some other countries standing in line for financial aid, including Portugal , Ireland and Iceland. All the mentioned countries used to benefit from the low interest rates at which they used to borrow. They failed to wisely manage their budgets, which resulted in a huge budget deficit for each of them. As a result, most investors lost confidence in their solvency.
Now the biggest problem is that some other countries may default if the EU refuses to bail out Greece. In order to avoid the destiny of Greece the other sick economies may try to manipulate the statistic data, which will only aggravate the situation and will make the disintegration of the Euro-zone more probable. Greece was lying that its budget deficit didn’t exceed 3-4%, later the shocking truth about the 12% deficit was revealed.
Another threat is that more EU members start joining the company of the debt-ridden sick economies. Fortunately, investors are still confident in the economies of Spain, Italy and Belgium. However, the perspectives are unfavorable. For example in late 2010 Belgium’s debt was equal to 96.8% of the GDP, which was the biggest value after Greece and Italy.
High inflation rate as an indicator of the Euro-zone crisis.
ü In early 2011 the inflation rate (y/y) reached 3%. Now it’s obvious that the ECB won’t manage to curb it.
ü At the same time the US shows an ability to curb inflation (the inflation rate (y/y) is maintained at 2.1% a year).
ü In mid April 2011 the ECB decided to increase the key interest rate from 1% up to 1.25%. For 2 years the interest rate had been reduced while stimulating business activity.
The collapse of Euro as a consequence of all the European troubles.
ü All the debt problems cannot but affect the European stock indexes.
ü The lowering of the Greek credit rating and a negative forecast for Italy’s sovereign rating (a decline from stable down to negative), the change of power in Spain, a decline in Germany’s manufacturing and non-manufacturing production - all these factors seriously damage the Euro-zone’s image in the major market participants’ eyes.
ü The decline of the European stock indexes resembled a market collapse. On Monday Italian FTSE MIB declined by 3,32%, French САС 40 lost 2,01%, German DAX — 2%, British FTSE 100 — 1,89%, Greek FTSE/ASE 20 — 1,5%, Spanish IBEX 35 — 1,41%.
ü The Euro currency rate keeps following the stock indexes. It has already reached the historic low against the Swiss Franc (1,2323). EURUSD reached the 2-month low around $1,3968. Yet the near-term forecasts are unfavorable for the common currency.
According to the Department of studying Masterforex-V trading system , the mid-term trend of EURUSD remains bullish. The price is forming either a short wave b(C) of the uptrend or a new (potentially reversal) bearish wave of the senior wave level. The first reversal signal will be a break below the defensive MF pivot 2 and the blue” sloping channel (as shown below):
a) Until pivot 2+SC stay untouched, b(C ) and c(C ) are probable
b) Once they are overcome = potential reversal wave A
ü watch the correction grid of the senior TF; B+ FZR = full-grown FZR = change of trend
ü breaking above the high of а(С)/С; wave level increase; the formation of another bullish reference point; a new short bullish wave а(С)/С
Market Leader offers you to participate in a survey. Just visit ’s forum for traders and investors and chose the answer to the following question:
When will the Euro-zone countries regain investors’ confidence?
· Not until 2013
· Not in the near future
· The investors have never lost confidence in the Euro-zone. They just prefer to wait for a while until everything calms down
