Axel Weber: “Greek bailout will be implemented soon”

Axel Weber: “Greek bailout will be implemented soon”

Axel Weber: “Greek bailout will be implemented soon”

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Home Page > Finance > Currency Trading > Axel Weber: “Greek bailout will be implemented soon”

Axel Weber: “Greek bailout will be implemented soon”

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Posted: Apr 28, 2010 |Comments: 0




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Axel Weber: “Greek bailout will be implemented soon”

By: Forex Ace

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Article Source: http://www.articlesbase.com/Axel Weber: “Greek bailout will be implemented soon”

The man who is likely to succeed Jean-Claude Trichet as the President of the European Central Bank reportedly said that the Greek bailout will be implemented soon and dismissed the idea that the Euro Zone is at risk of falling apart.

“There is no credibility problem of the currency” Bundesbank boss Axel Weber said in an interview Monday evening. Yet, the single European currency sunk to a new one-year low against the U.S Dollar yesterday following the news that both Greece’s and Portugal’s credit rating had been slashed, yet again.

The Euro plunged 1.94% from its opening price of .34028, to hit .31429, on the forex trading market yesterday as concerns escalated that Greece’s debt crisis would spread to Portugal. The ratings downgrades on the two countries fueled the selloff of the Euro as (forex) investors sought the protection of more risk-adverse currencies while shattering Europe’s hopes on containing the crisis.

Greece became the first Euro Zone nation to have its credit rating cut to “junk” by Standard & Poor’s, a  move that will make now nearly impossible for Greece to borrow, dashing any remaining hopes of the debt-stricken nation’s recovery.

Portugal, who like Greece is struggling to rein in its budget deficit, suffered a two notch downgrade. While this downgrade left its investment-grade intact, it severally raised concerns about the country’s possible tragic fate. 

According to Mr. Axel’s colleague on the ECB ruling council Yves Mersch “If you look at the perception of the euro in international financial markets, the euro is viewed as a strong currency”. While this may have been true a year ago, the currency has steadily sunk lower and lower under the increasing weight Greece’s financial problems.

The single currency has lost about 7% of its value against the American Dollar since it was published that Greece’s deficit was more than 4 times the allowed EU limit.

Now as the fear of contagion sweeps across the (forex) market, the fate of the Euro rests in the hands of the German Government and the European Central Bank. Germany must decide whether to commit its highly reluctant taxpayers to a vast Greek bailout.

If the package is too small, markets will conclude the Euro zone is unwilling and unable to support its members, triggering contagion to other countries and a possible break-up of the euro zone. But if Germany agrees a big enough package to draw a line under Greece’s funding problems for several years, as investors seem to be demanding, it must do so aware it is unlikely to get all its money back. After all, investors now suspect Greece’s problem is one of solvency rather than simply liquidity.

The ECB is faced with a no less complicated situation.  The central bank must decide whether to continue accepting Greek government debt as collateral for its lending operations if all three major ratings firms downgrade it to junk.

Under ECB rules, already weakened once to accommodate Greece, eligibility requires at least one investment-grade rating. Moody’s Investors Service still rates Greek debt four notches above junk. It may retain that investment-grade rating if an aid package materializes—after all, global banks remained investment-grade even after Lehman’s collapse, thanks to government support. But S&P’s three-notch downgrade shows how quickly the situation can change.

For the ECB, a decision to accept junk paper would be a blow to its credibility and confidence in the single currency, confirming fears the euro zone lacks discipline. But refusal to accept Greek paper would play havoc with the euro-zone financial system, inflicting huge losses on European banks that could necessitate further rescues.

Germany and the ECB policymakers are now swimming in uncharted waters, faced with an impossible situation that has no right solution. Both paths could very well lead to the demise of the single currency, and the end of more than a decade’s worth of work of trying to a form complete economic union across Europe.

However, whatever or however the EU decides to proceed, it should do so quickly. Time is ticking, and with every tick, the price of the Euro falls (on the forex market) as the level of uncertainty grows.

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