Can Europe Handle Another Greek Crisis?
Equity markets in Europe and the US were down sharply on Monday as Greece captured all of the headlines. Many European stock indexes lost over 2% to begin the first trading week of the new year. Gold and Silver rallied, despite a strong US Dollar, as investors sold risk assets.
The Euro also sold off falling to 1.1861 vs. the Dollar at one point on Monday, which is the lowest level since 2006. (Source: RT.com 01/05/2015) Questions are emerging about whether or not Greece will remain a part of the Euro currency region. Should the country default on its bailout terms it is unlikely that Germany will approve a second round of funding.
According to a report from Der Spiegel, German Chancellor Merkel and Finance Minister Wolfgang Schaeuble believe the Euro currency would be able to survive should Greece decide to leave. (Source: RT.com 01/05/2015) While that is likely to be true, the concern would shift to whether a Greece exit would encourage other countries like Spain, Ireland and/or Italy to decide to leave as well.
Will the ECB Step in With Another Round of Stimulus?
The ECB is likely very happy with the fall of the Euro over the last several months. However, given the lack of growth in the region combined with new concerns developing over Greece, more intervention by the Central Bank now seems inevitable.
According to an article in Bloomberg, ECB President Mario Draghi has signaled support for a large scale government bond buying program. While other governors, including Bundesbank President Jens Weidmann, would like to hold off at this point. (Source: Bloomberg 01/06/2015)
The market seems to be anticipating that some sort of action by the Central Bank will be coming very soon. In the same Bloomberg article referenced above, Howard Archer, chief European economist at IHS Global Insight in London said “The odds now strongly favor the ECB engaging in QE in the first quarter of 2015.”
Unless there is a dramatic turnaround in the growth prospects for the the EuroZone economy, it is going to be very difficult for the ECB to sit back and do nothing. Even though Germany seems to disapprove of more stimulus at this point, European markets will likely selloff should the ECB postpone any new stimulus measures.
With world markets so interconnected, market participants will be watching this story closely in the coming weeks and months.
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