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Forex traders were glued to their screens following the price action on Italian bonds after the bond yields on Eurozone’s third largest economy hit lifetime highs, raising fears that Italy could be next to suffer in the crisis.
So far, EU officials have been treating the debt crisis as a liquidity issue that can be dealt with using bail-outs. However, if economies the size of Italy get caught up in it, then broader structural changes to the eurozone are likely to be required.
The Financial Times reported some EU leaders were considering allowing a selective default by Greece to put its debt on a more sustainable footing. The FT report followed comments by Dutch Finance Minister Jan Kees de Jager who became the first euro-zone official to say publicly that a voluntary rollover of Greek debt isn't realistic and that he doesn't see much harm if the country is categorized as "in default" by rating agencies.
De Jager said it's unreasonable to expect a voluntarily participation and that some pressure on bond holders may be required. But rating agencies have warned that if any private-sector contribution isn't considered voluntary, this could be deemed as a default by Greece on its debt.
The FT reported that a German-led group of creditor countries has for weeks been attempting to get "voluntary" help from private bondholders to delay repayment of Greek bonds, a move they hoped would lower Greece's overall debt while avoiding a default. Under the plan, Greek debt holders would swap their holdings for new, longer-maturing bonds and in this way help reduce Greece’s outstanding debt by up to 10% through the open buybacks in the market.
Since Greek bonds are currently trading below face value, such purchases would essentially be a voluntary "haircut", since bondholders would accept payment for far less than the bonds are worth, the FT reported.
The EU needs to move fast to resolve the issue with how to deal with Greece, otherwise it risks seeing the debt crisis spread from the periphery to Italy and Spain.
While Europe is keeping the news agencies busy, there are also mounting problems in the US, which still needs to solve its debt ceiling negotiations. Timothy Geithner, the Treasury Secretary said that the country is "not going to default" on its debt obligations despite an apparent stalemate between Republicans and Democrats on its budget, which both sides need to resolve, otherwise, the US will not be able to issue new debt after August 2 and in effect, default on its debt.
More trouble is also brewing in Asia, as China faces an economic slowdown with inflation showing no signs of cooling off, despite multiple rate hikes and bank reserve increases to curb borrowing. China raised interest rates for the third time this year last Wednesday as taming inflation remains a top priority even as the pace of growth in its vast economy slows.
Risky assets, particularly those with direct links to China's growth, sold off after the announcement on concerns the latest monetary tightening could choke an already sluggish global recovery.
If Chinese growth data and retail sales figures due July 13 come weak, this may hurt the euro and other commodity currencies, but ongoing negotiations in the US will remind forex traders to be extra careful, lest they sell the euro close to the recent bottom of the 1.40-1.45 range.
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(Shavasb Bohdjalian is an approved Investment Advisor and CEO of Eurivex Ltd., a Cyprus Investment Firm, authorized and regulated by CySEC, license #114/10. The views expressed above are personal and do not bind the company and are subject to change without notice. The comments mentioned above are not to be considered as an offer to subscribe, invest or benefit from an investment scheme, nor are to be considered as advice for trading in markets. The comments are for information purposes only and are general in nature. The examples will vary and depend on individual circumstances)
