Boundless optimism is suddenly prevailing, simply because a bunch of Europeans said they are going to solve their problems, honest injun! That the resolution relies on banks taking a big loss on Greek sovereign debt (50% write down) and Germany insisting that the European Central Bank not be involved in the new 1 Trillion Euro fund might just hint that the resolution is not much of a resolution at all. Germany obviously has it's doubts, if it wants to protect the ECB from what might happen.
Still, so desperate is the market for good news, any news, that even the results of that meeting were sufficient. I saw a report that it appears that Europe has already slipped back into recession, based on the indicators. That will make it that much more difficult (in Greece's cases I would say impossible) to cut deficits and pay down debt in the PIIGS.
I am starting to come to the view that a staggered, controled default by Greece may be their only way out of the quagmire. Properly managed, by the ECB, it just might stave off bank collapses in other parts of Europe. Of course, teh 50% write downs might be seen as a default in another guise.
The AUD has, in the last 24 hours, risen from US$1.0394 to US1.0727. The risk appetite is back! At least till Friday night (Australian time), or maybe even as far out as Monday or Tuesday next week!
"It's all good! Greece and the rest of Europe is saved! Risk is good! Risk is great! Let's take on risk! American Dollars?? Who wants American Dollars, they don't pay any interest? We want assets we can make money on! Like those funny plastic Aussie Dollars and that yellow stuff, what was it again? Oh yes, gold! Gold will make us rich, rich I tell you!"
Well, I hate to say "I told you so!", but..... The AUD is down nearly 4c and the EURO is unloved. Seems the deal wasn't really much more than window dressing, once it was examined. Add to that the bombshell that Greece may hold a referendum to decide if the plan is to go though.
Let's see, the question is (in essence) "Do you agree to a massive cut in government spending, a rise in taxes and some other nasties?"
Unless the Greek Government has suddenly become the world's best sellers of fact and the Greek polis suddenly decides that they should not only pay existing taxes but also new and higher one's, well...doomed to fail I would have thought.
Of course the alternative is even more unpalatable. Default, with no possibility of borrowing as a result. A 9% deficit suddenly cannot be funded and spending has to be even more heavily slashed, jobs have to go and benefits dry up. Going back to their own currency and just printing money won't help, the pathway to hyper inflation and even more total collapse.
I am sure many will be saying that a referendum is democracy in action and that it is best for the electorate to decide their own fate. Unfortunately, it isn't just Greece at risk here. The funds set aside for bank recapitalisation (to cover the 50% haircut they are to take on Greek sovereign debt), only agreed last week, would be totally inadequate in the circumstance of a Greek default occasioned by a No vote in the referendum (assuming it ends up being held).
Further, until the referendum is held then expect turmoil. The Greek government needs
that bailout money to stay afloat. They won't get it until the deal is ratified and implemented.
Add to that the fact that the Greek Government now only controls 152 of 300 seats in Parliament (they need 151 to get the referendum proposal agreed) and the likelihood (to me, from afar admittedly) of a collapse of the government (they have to survive a confidence vote on Friday). Well, Europe is not in for a very happy time.
The USD is going to continue to appreciate as funds once again flow into the safe haven of US Treasuries.