Greece is in the process of making a U-turn on it’s democratic, but somewhat predictable, decision to hold a referendum on its bailout options. Predictable not in the sense that it was something which was bound to happen in the cradle of democracy that gave birth to the psephos hundred of years ago, but simply predictable in the outcome of such an action. For a nation that has felt the full force of IMF-induced austerity measures, imputed on it like an experimental, medieval medication, it is almost impossible to assume that the majority of citizens would even consider more conditional hand-outs. There appears to be a growing sense of disillusionment not only amongst the Greeks but also with their Italian and Spanish counterparts who, worryingly for the Euro, are starting to look back in fondness at the ‘good times’ under the Drachma, lira and peseta. Perhaps it would be best not to mention the tumultuous transition that would have to occur in order to restore this nostalgia.
The Euro was designed as a permanent fixture and exiting from this is really a last resort. It would include huge losses for national and international creditors, bankrupt businesses and hyperinflation. Greek banks would become bust and the losses incurred by some international banks would also indebt them so heavily that they too may fold. This impact would occur despite Greece being a relatively small economy and the possibility of such far-reaching repercussions would be felt in vast multiples of this if Italy or Spain decided that they would be better off outside of the single currency. Such a situation is hyperbole at the moment but if viable credit becomes scarce or untenable as countries near default then it could become a possibility. As valuable a political tool as the democratic process is, it is also highly reactionary. Allowing a general vote on the continuation of austerity or the return to a ‘golden age’ where currencies were individual and nationalistic is foregone conclusive outcome.
The Euro, understandably, was under some pressure yesterday as decisions, rumours and an unexpected ECB rate cut gave many a reason to go short or stay out. It moved consistently lower from midday today after a positive start and only managed to claw back some of these losses after market a hour which is often a more ominous sign. The ECB rate cut in attempts to stabilise the region and the ‘double-dip’ was a top feature driving its decline as the sovereign debt crisis failed to step out of the spotlight. It has hit what looks like, at the very least, a short term top although technically it should perhaps retest the 1.400 resistance which it so abruptly defeated and then fell back through on Halloween after bouncing off the underneath of its recent trend line. For the short term, bail out is a word hanging over the Euro like a grey cloud and it looks like that’s exactly what short term investors are doing too. Unless some seriously positive new will emerge from Greece or Italy, which looks unlikely tomorrow. The dollar therefore looks to be one of the currencies set to gain on the pure fundamentals driving the markets.