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A funny thing happened on the way to bailing out Greece... As Spyns Tour de France clients gear up to watch Lance contest an unprecedented 8th yellow jersey, I'm thrilled that all of my euro predictions have come true. The euro is now trading at around $1.32. Unlikely the common currency will dip much further in my opinion.
The euro has been surprisingly resilient despite almost 4 months of 'Greek crisis' headlines. To no one's surprise, the European Union's wan promises of help, thin 2-page press release, and now full-blown bailout have failed to contain the problem. Greece is unfortunately beyond redemption. Had the Greeks imposed some sort of fiscal restraint 5-7 years ago, it would have made a difference. With almost 300 billion in reported debts, and more hidden debts undoubtedly to come, someone is going to have to take a haircut (read: French and German banks).
Barring default, the euro is unlikely to fall below $1.30 because there are now so many short positions that any positive news will cause an uptick in the common currency. Take for example the euro's light appreciation on rumours of a larger IMF bailout.
While the Greeks and most of Europe blame Germany for foot-dragging on the bailout, I applaud German Chancellor Angela Merkel for injecting some realism into what has become a political debate. Like Merkel, I cannot see how loaning the Greeks more money solves the problem. Clearly there are fundamental structural problems with Greece's economy, and many other European debtors (bonjour France).
Germany rightfully fears not the 8 or 9 billion euros it has to loan Greece now, but the half trillion euros in loans other European countries will likely need to stablilize their economies. Portugal is too small to maintain media attention but Spain, facing approximately 36 billion euros in bond redeptions (rolling over existing debt) will inevitably pay higher interest rates. The markets will eventually start demanding higher interest rates for Italy, France, and finally the UK.
So what does all this mean to Spyns Tour de France clients? It means a slightly better euro/dollar exchange rate for one. It will likely hover and stabilize around 1 euro = $1.30. This is welcome news after the $1.45 exchange rate in the summer of 2009 and the punishing $1.65 exchange rate in the summer of 2008.
My predictions for the Greek crisis are as follows: first, the Europeans will continue to dither because Europe lacks strong, decisive leadership (it has no fewer than 3 presidents); second, delays will lead to greater IMF involvement as they can distribute funds more quickly than a gaggle of European governments; third, the Germans will eventually talk their way out of a bailout because thrifty German voters can't stomach it; and finally, interest rates will inexorably rise strangling Portugal, Ireland, Italy and then finally the core economies of France and the UK for example.
Greece confirms that governments cannot continue to ring up debt, pay near zero interest rates, and hope the markets won't price in risk while their economies contract. Although I don't expect the euro to dip below $1.30 in the short-term, the greater risk is sovereign debt default. It simply started with Greece.
Spyns is an active travel company based in Whister, BC (Canada) and Beaujolais France. Spyns offers active holidays to Europe including trips to the 2010 Tour de France. For more information about Spyns 2010 Tour de France tours, please visit http://www.tdf-tours.com, http://www.spyns.com or call 1.888.825.4720.
