Credit rating agency Moodys downgraded the Greek rating from Caa1 to Ca, a three notch downgrade which now only leaves them two short of a ‘default’ rating. Despite this cut Moodys remained upbeat about the long term prospects of Greece despite reinforcing that any debt swap would be considered (at least by them) as a default.
It seems now that a Greek default has pretty much been agreed and whether they are let to be labelled that by rating agencies is just a matter of time. However as strange as it sounds this really could lead to some Euro strength. If the Greeks are having a controlled default then contagion is less likely to spread and this has been the number one concern for people with money in Euros. For that reason I think we may see some short term Euro strength this week, especially against Sterling which may suffer from some potentially miserable GDP figures tomorrow.
So what about that long term?
Do not be fooled into thinking contagion is now a dead issue. In my mind these problems will flare up again, it is not just Greece that is in trouble in Europe, despite planned restructuring of debt here and also in Portugal and Ireland, other countries such as Spain and Italy pose more of a threat to the Eurozone as a single entity than the other countries combined and others such as Belgium also sit uncomfortably in terms of debt to GDP ratio. Whilst bonds reman affordable for these countries and debt is long term enough they are likely to remain in an ok position, but we have seen with Greece how quickly you can go from at first needing a bailout, to a full default 200 billion Euros later.
Consider the state of the Eurozone like a disease, whilst at the moment the powers that be are doing everything they can to null the pain and contain the virus, no-one has a firm plan to stop this from spreading. This restructuring of the debt is the first roll of the dice, as an experimental cure goes but I don’t believe anyone expects this to completely solve the issue.
This is a step in the right direction but it is not the end of these problems. If you are hedging your bets on what may happen with the Euro then I would predict some strength for the Euro this week and in particular to be 1.12 or below against Sterling and around 1.45 vs the USD, but I still believe the Euro to be vastly overvalued at the moment. If you are waiting for rates to peak or head back to 18 month highs be careful you are not trying to stretch it too far. You can fill in an account application to the right and either myself or one of the other eurorateforecast.com team will get back to you to provide you market commentary and live trading prices.