F/X Weekly Comment

A pretty quiet week in the currency markets really, with little to get excited about. That is if you are deaf, blind, and can't smell rotten fish at ten paces. In fact it was pure theatre, a hairsbreadth away from being totally momentous. Sarkozy and Merkel walked to the edge of the abyss, looked down, and nearly wet themselves (OK, I apologise in advance for the poor taste there). Then they reached for the cheque book and hoped for salvation ( I nearly put 'prayed' there, but I'm probably in enough trouble already).

Greece
Greece is up to its keftedes in 'merde'. It has been for a long time. It should never have been allowed to join the Euro in the first place; indeed it never passed the tests for entry. It is no surprise that it is one of the first countries to go bust. It is totally unsuited to the handcuffs that a single currency brings to its economy. That is actually an economy that runs on 'brown envelopes'. Fakelaki is the Greek word for it, and it equates to corruption.
So, having gone bust, it receives a €79bn bailout, and with it comes stringent doses of financial medicine. Too much for the Greeks to stomach, they threaten to default on their debt, but their debt is Euro debt, and that doesn't go down well in Brussels. Cue bailout number 2, this time for another €109bn, giving them longer to repay, and at lower interest rates. Oh, by the way, we'll let Ireland and Portugal have these lower rates too, just to keep them quiet.

Greece
Greece has absolutely no chance of repaying this debt, yet the powers that be insist on continually papering over the cracks. And this week, yet again, the market bought it, and the Euro rallied at the sight of firm and concisive action from European leaders. Now I very rarely get particularly het up over financial matters, but I cannot grasp this logic, unless of course it is based entirely in self-preservation on the part of market participants (surely not?). If I were a modern George Soros, with a few billion to use speculating in the currency markets, I'd be after the Euro. I'd be so short of the Euro that you'd have to spell it with fewer letters. 'Going short' by the way refers to selling something you haven't actually got, in the anticipation that you will be able to buy it at a later date to fulfil your debt at much lower cost.

And more Greece
This second bailout, to my mind, constitutes default, and it will be interesting to see if the rating agencies agree with me next week. If they do, justice could yet be done, and sterling may even get to 1.20 plus, where it should in my view be today. More likely though, the agencies will follow the herd, and we'll soon be struggling to hold on to the 1.12 level. If they have the nerve to call it as it is, and the market realises that it could have a lame duck in its sights (like sterling in the ERM in 1992) we could really have some fun...