The economic debacle of Greece continues as Greek politicians can’t seem to agree on who should lead them out of the frying pan and into the proverbial fire.  The former Prime Minister, George Papandreo, stepped down earlier this week to placate the concerns, of the opposition and coalition parties, about the requirements to obtain the most recent EU bailout package.   This situation may go on for a while since Papandreo appears to be a rare type of politician, one who does what is best for his country.

In Italy, Silvio Berlusconi also promised to resign.  Although this is a long overdue move, journalists  everywhere will bemoan the end of “bunga, bunga” parties and the resulting scandals that sold newspapers by the ton.  The problems in Italy have been simmering for a while and the latest consequence was seen with bond yields cresting the ominous 7% level earlier today.  This level represents a huge increase in interest costs for a country that has a high debt to GDP ratio, reportedly about 120%. Greece, Ireland and Portugal all required bailouts after their bond yields exceeded 7%.  Italy is the third largest economy in the EU and is relatively wealthy compared to previous bailout recipients.   This means that Italy has the means to solve the its debt problem through austerity measures and budgetary control.  If the required measures are not taken, the Italian debt which is about 1.9 trillion Euros, would be too much of a burden for the EU to bailout.  Then the problems could get very serious.

This week saw the Canadian dollar lose about 2.5 cents as investors once again sought the safety of the huge US currency market.   If Italy does not act quickly, we may see the dollar drop another couple  cents in the week ahead.  This represents an opportunity for US clients to book Canadian dollars at a good rate for potential property purchases.

Interest rates remain unchanged and the latest news from Europe suggests that rates will remain in the same range for quite a while. 

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Jason McLean   BSc, AMP

jason@garibaldimortgage.com

Comment (33)

It seems like Greece is getting addicted to being in the spotlight of the world's financial news.  After positive news last week, that the European Union managed to agree on a number of measures to assist Greece in avoiding default, the Greek government stunned everyone by stating that a public referendum would be required to ensure that its citizens would support the move.  Although this may seem like an admirable move of the birthplace of democracy, the announcement created tremendous uncertainty in the financial markets.  This was seen in the dramatic movements of the markets earlier this week, including the Canadian dollar which lost almost 2 cents on the news.  

Today, Greece announced that it would not proceed with the referendum if it had reached an agreement with the government opposition to prevent the collapse of the Greek government over this issue.  The government and its opposition have come to the conclusion that it will be better to remain in the European Union and try to claw its way back to solvency over the next decade than to be kicked out of the EU and suffer the consequences alone.  If kicked out of the EU, the currency would presumably return to the drachma which would suffer a serious devaluation.  Bargain hunting property buyers were probably salivating over the prospect since Greek properties would likely be available at rock bottom prices.  However, the likelihood of high inflation and maybe even hyperinflation would  soon erode most of the benefits of cheap vacation property.

The markets, and the Canadian dollar, are all up on today’s news but after the events of the past week the markets will likely take most news out of Greece with a little more salt.   Although the latest news does not mean that Greece can avoid default or that it won’t eventually be kicked out of the EU, at least it is  step in the right direction.   The extreme belt-tightening measures Greece is required to make  by the EU plan mean that there will be much more turmoil before this is resolved. Although many have predicted that Greece will eventually default and be forced out of the EU, the bigger concern is that Italy may be the next  country to require a bailout.  The EU could survive without the relatively small economy of Greece  but since Italy is a much larger economy, the EU could be facing dissolution if the contagion is not contained.

The European Central Bank reduced their main interest rate by 0.25% despite increasing evidence of an inflationary trend.  This is going to stimulate inflation further but there are few, if any, alternatives  at the moment.

Canada remains a beacon of stability and a relative economic safe haven in the global economy.    Predictable politics, conservative fiscal policy and vast resources should keep us on the right side of the global economic spectrum.  The dollar should remain around par, with movements of $0.02 in a single day potentially becoming the norm, until the European crisis is resolved.

Interest rates remain very low, although slightly higher than a few weeks ago.   There is room in the spreads for lenders to reduce rates but without a more certain economic outlook, the lenders are keeping the high spreads as a buffer against  the global effects on our short-term bond yields.

Comment (82)