Questions surrounding Greece’s solvency and the resulting fallout continue to grow. In recent days, more than one commentator has openly asked if it’s the beginning of the end for European common currency.
“Not so fast,” says a prominent currency fund manager, who’s actually in the process of buying euros. He argues that whatever happens, it will provide needed clarity and will positively impact currency markets.
So which is it; Midas riches or Icarus flight?
We took this debate to the (thankfully) nonpartisan Peterson Institute for International Economics. The D.C.-based think tank counts a former treasury secretary, current PIMCO head, and a Rockefeller as board members, so we think they know what they’re talking about.
Senior Research Fellow Jacob Kirkegaard has been with the Institute since 2002. Before joining, he worked with the Danish Ministry of Defense, the United Nations in Iraq, and in the private financial sector. His research focuses on European economies and reform, pension systems and accounting rules, demographics, offshoring, high-skilled immigration and the impact of information technology. He’s the author of four books on the topics.
Boomer Market Advisor (BMA): Let’s get right to it; will Greece default?
Jacob Kirkegaard: I think Greece will default, which will actually have a significantly negative impact on the euro in the short-run. I hope the currency manager you mentioned has strong hedging measures in place.
BMA: What happens from there?
JK: The question then becomes containing the contagion, so to speak. The 120 billion euros the IMF has committed will be brought for debate in the German Parliament next week. The Germans will attach serious conditions to their portion, because they recognize Greece’s debt-to-GDP ratio will still be at 140 percent to 150 percent after three years. The IMF commitment covers debt refinancing for three years, so in essence they’re simply delaying the inevitable. Does anyone believe in 2013 Greece will be offered 4% on a 10-year bond? I mean, c’mon.
BMA: So what does this mean for other “at-risk” countries, specifically Portugal and Spain?