Euro/ Dollar: The Depreciation Race

Last pressure on the Euro was due to the market's fear of Greece default and Spain deficit exposure in the media. Meanwhile Joaquin Almunia, the UE commissionaire for the Economic and Monetary affairs completely swiped any Greece default posibility and denied any expulsion of Greece out of the Euro zone. It is understood that Papaconstantinou, Greek's Finance Minister, will present a deficit reduction plan to ECOFIN and he has declared that Greece will be able to find funds via the monetary market with its 10 yr bond now trading near 7%.

Strangely, Greece with 12.7% of GDP of deficit estimates to come back to Maastricht 3% criteria  in 2012 while Spain with 11.4% of GDP of deficit, estimates to be back to norms in 2013. Both countries will present a rigorous deficit reduction plan with the following principles:

- Freeze of Public spending. Notice it also implies reduction and less hiring of state employees.

- Tax increases.

- And finally, legal retirement age pushed from 65 to 67 for Spain.

Obviously all those plans are based on the perspective of a very high economic growth but with unemployment over 18% in Spain and 9.8% in Greece. We may question if the tax increases for the little active workers left would be enough, we also have to consider an  eventual social disappointment from tax payers.

Meanwhile, quoting Joaquin Almunia: "There is no way Greece default" which make many investors think there could be a EU support in case of default. We can suppose the first step would be an absorption of part of the Greek or Spanish debt by the Euro community and a European stimulus supported by the European Central Bank. In the worst case scenario the International Monetary Fund would intervene to avoid a systemic risk.

In fact, a depreciation of the currency is needed to lean the deficit.The question being who will depreciate its currency faster USA or EU. We see very clearly here a "competitive depreciation" we forecast, either on purpose or not, it is there.

That being said we must acknowledge that even if the euro convergence criteria ("stability and growth" in french) is not respected, at least there is such a "pact" in Europe. While USA has no control on their deficit and recently the senate approved a debt ceiling hike: pushing the deficit limit to 14 Trillion dollars of debt.

The Story is not over, today it's Greece, tomorrow it will be USA deficit and we probably will hear more about Spain after, the competitive depreciation ball bouncing between Europe and America.Until China reacts... to be continued...

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