The second bailout package deal was supposed to be design to stem the contagion that seems set on spreading from country to country and over the last few months there has been worrying signs that this has not been the case.  Italy and Spain did not avoid pressure from the markets recently and the ECB had to step in and buy up sovereign debt to lower the yields, however the ECB can not keep buying up bonds forever.

It has recently been argued that the so called euro-bonds that would provide a solution to the troubled debt riddle zone.  This super bond would be backed by all 17 single currency members and provide investors with a strong low risk investment as an alternative to individual county debt.  However Germany will not agree to be part of this euro-bond whilst fiscal policy remains under the control of each member.  From the recent disquiet in Greece it is unlikely be any means that Greece or any country will be willing to hand over their budget and spending freedom to Germany, but the recent court hearing has all but declared that if Germany is no longer prepared to pay for the mistake of others/ Surrendering fiscal sovereignty to Germany may be the only way of attaining German money.

The dollar seems to have gained strength as President Obama has pledged $447 billion of stimulus to get the US economy off of its knees.  Any serious consideration by congress is likely to strengthen the dollar as investors become encourage by growth prospects.

If the ERU/ USD continues to fall then 1.3591, 1.3437 and 1.3338 provide significant support levels with which to mark likely bullish entries into the market.

If the EUR/ USD rallies in the coming days however then 1.3717, 1.3885 and 1.4227 are significant resistance levels at which sellers are likely to enter.

The Republicans are holding steadfast onto their ideals that the budgets moving forward should not include new revenue streams and that spending should be cut. Democrats are arguing that to decrease spending is to jeopardize growth and new tax streams should play its part in austerity and reducing the debt level. 

Is the US likely to Default? Conventional thinking also known as common sense would say no. For the US to default would mean a stalling of global finances and a well oiled system crashing to a halt. Many assets are priced using US treasuries as a base which would throw that system into disarray. US treasures are also used as collateral against loans around the word as they are seen as a no risk investment and a default would throw that system into chaos as world economics try and adjust. As the deadline approaches and no deal on the table, investors may start to get twitchy.

The GBP/ USD has been trading in a range, loosing ground against the GBP from recent gains. This coming week may see some direction breaking through 1.6470 with targets at 1.6668 and 1.7081 as key price levels where sellers are likely to enter the markets.

If investor’s gains back confidence then 1.5999 is a likely area for buyers to come in at. 1.5593 and 1.5320 are strong key levels for short targets.

There have been significant compromises most notably by the ECB who have conceded on accepting Greek collateral if the EFSF guarantees the loans. The likely scenario is that the bailout will now be likely seen as a selective default by agencies. Private bond holders will be involved for the first time to contribute to a target of €37bn in addition to the new €109bn bail out fund.

A sigh of relief? For the time being yes. The key is that a solution has been found to satisfy the parties involved and the idea being that until Greece is able to financially stand on its own two feet again, it will be supported by Europe. There will be relief also felt by Ireland and Portugal as well as Greece as the rate in which they have to pay back their own bailout fund will be cut to around 3.5% which were previously around 5.5%.

Greece still has a long way to go and most likely will still have a debt to GDP ratio that will be unsustainable and will have to be addressed again in the future. At least for now there is a light at the end of the tunnel although there could be some delay in getting there.

Have I too much time on my hands? Well sometimes yes; there are only so many documentaries about, well …you can guess. However, the parallel should be obvious as we head out of the worst recession to hit the global markets, into the week that should see a decision being made regarding the austerity measure of Greece; if Greece stops swimming it will share the same fate.

Greece needs money. However, we have all known that ‘friend’ who we have allot of sympathy for that has gone through a bad time, made a few wrong decisions and we have said “I feel so sorry for you, I’m here if you ever need to talk”, knowing full well that the one thing he really is hoping for is that you put your hand in your pocket to help him get through the week. Only we won’t, because we are concerned that we’ll never see that money again.

So what do we have here? In order to bail out Greece, that money has to come from somewhere, in this instance the ECB. Governments need money and so interest rates will rise. The reason interest rates will rise is because they will have to borrow money at a higher risk premium because no one will feel as secure in buying government bonds. In order to pay for these higher premiums, governments will have to raise the money by doing what they do best…raising tax revenue. In the face of slow economic growth, the ripple effect will reach out to everyone as wages are rising more slowly and disposable income is dwindling. Without that income being pumped into the economy we find ourselves in a viscous circle which will not be helped by increasing taxes. However, governments can not print any more money because that would reduce the value of their bonds further and hence not be able to raise money by selling them which leaves them little choice.

So why lend to Greece? Why do we care?

We care because it will affect the very foundations of the EU and if Greece is bailed out, then there is only one place that money is coming from and that is the tax revenue by every member nation.

If Greece is allowed to default then the results could be catastrophic. Not least because the euro would fall in value, strengthening the value of other currencies against it which would have an affect on imports into euro as they would become more unaffordable to buy. This would also then have the knock on effect of stifling growth by exporting nations into the European zone.

In order to secure the necessary funding for a bailout, Greece has to provide the necessary budget deficit and this will only be provided with an increase in tax revenue. To further complicate this, if investors pull their capital out of Greek banks, this could cause a bank run leading to a collapse in credit and hence another credit crunch and as we have seen, credit crunches have an uncanny way of spreading. In this case, to other vulnerable European nations. In short this is everyone’s problem.

We shall see what will be decided, however if there is one sure thing on the table its that if the Euro has any hope of securing a credible future on the world stage, it has to survive.

Keeping swimming!