Greece and the tumbling euro

Financial Times
May 16, 2011

Anyone who trusted the politicians, Eurocrats and central bankers would have lost a lot of money in Europe in the past year. But the myth that default is unthinkable has finally been knocked down. On Sunday, Wolfgang Schäuble, Germany’s finance minister, hinted that the private sector might have to take part in any extension of Greek debt. The European Commission followed up on Monday by insisting that “reprofiling” – refusing to pay back loans when they are due – was different to restructuring – refusing to pay debts in full.

If this was meant to be a softening-up exercise, it was too late. Greek debt already trades at levels implying a default is all but inevitable.

The euro, too, was unaffected by the sudden bout of honesty. In fact, it rose slightly against the dollar on disappointing New York manufacturing data.

The euro has ignored soaring Greek yields and risen this year on the back of the surging German economy. The European Central Bank gave hopes of imminent rate rises a knock at its last meeting two weeks ago. But the best explanation for the depth of the euro’s tumble since then seems to be that fears of a global slowdown have hit overextended traders.

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