The drama continues in Europe following S&P’s slide on Greece debt to junk status and the two notch decline to Portugal’s rating. There are some news-flow that IMF is about to announce a stepped-up aid package and ECB’s Trichet is set to make a trip to Berlin to meet with German parliamentarians today. Perhaps, it would not be too long after Greece bailout then surely next to be Portugal, Ireland, Spain and may even be the Italy.
What is more important to note from this development is that the inability of Greece and others within EMU to enact an independent monetary policy at a times of crisis has exposed the flaws of the union. The lack of cohesive national government is another flaw in times of turbulence, which is why the US has longevity and the Eurozone likely does not. It seems that it strikes some similarities in attempts at unionization in the region – the Latin Monetary Union and the Scandinavian Monetary Union in the late 19th century, which ultimately fizzled out.
In the recent NYT, Barclay’s analysts believe that Greece needs Euro90 billion to see it through, Euro40 billion for Portugal and Euro350 billion for Spain. That is Euro480 billion of refinancing help, which dwarfs the latest Euro45 billion EU-IMF joint and announcement by a factor of ten.
Beyond Greece and Portugal to Spain, its combined fiscal and current account deficits are the highest in the industrialized world. Think of all the global banks, most of them in Europe, which hold onto all this spurious Club Med debt. The reality is that the downside to the Euro, even at 1.32, is huge. Think of a retest to the lifetime lows of 0.85 at some point down the line.
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