As the Euro Surges, Another Risk for Greece
Geschrieben von hkarner - 30. April 2011
Date: 29-04-2011
Source: The Wall Street Journal
Greece has plenty to worry about: hard-hitting austerity measures designed to get the nation’s finances back on track, a shrinking economy, and the real risk that it can’t pay its debts.
Whether it needs to add a strong euro to that list is less clear.
The currency, used by 17 countries including Greece, is flying high, reaching a 16-month high of $1.4882 on Thursday, as investors flee the greenback in the expectation that U.S. interest rates will remain super-low for a long time, while others, including those of the euro area, push higher. Most impressively, the euro has risen nearly 14% against the dollar this year, despite the financial problems of Greece, Ireland and Portugal, all of which have had to accept international bailouts.
The shift in the euro is bad news for the euro zone’s exporters because it makes their goods abruptly more expensive abroad. If the current rumble in the dollar becomes an unnervingly rapid rout—a possibility that troubles many analysts and investors—this could slam all of the euro’s members. It would be a particular threat to the bloc’s most financially stressed members because they would find it even harder to use exports to expand their economies and crawl out from under their mountains of debt.
“If the slide in the dollar spins out of control, it could be dangerous,” said Kit Juckes, head of currencies research at French bank Société Générale in London. “If the euro rises to $1.50 or $1.60, that’s bad for Greece. It could cause the euro zone genuine economic pain.”
It isn’t just exports; tourism accounts for 18% of Greece’s gross domestic product, and one-fifth of its jobs. A weak dollar makes the U.S. a more attractive destinations for vacationers from the euro bloc who might otherwise have gone to Greece. Bond prices show that investors place high odds that Greece will default on its debts in the next few years. An extra risk is the last thing the fragile economy needs.
A minority, however, downplay the currency-related risks and instead maintain that the strengthening euro is a boon to the euro zone’s stragglers.
“A strong euro helps Greece. It keeps inflation at bay and it reduces the need for the European Central Bank to raise interest rates,” said Thanos Papasavvas, a currency fund manager at Investec Asset Management in London, which holds $10 billion in assets. He predicts the dollar will keep falling.
Commodities are generally priced in dollars, so a stronger euro makes them cheaper for the euro-area manufacturers, he said. If the European Central Bank raises interest rates more slowly than it otherwise would, it eases the pressure on Greece and other troubled countries that have seen borrowing costs soar.
Given that currencies in emerging Asian countries also are rising, there’s no risk to euro-zone exports to that region, he said.
Finally Greece and other stragglers aren’t the bloc’s exporters. Germany is the region’s growth and exports engine, and if anything, exporters there should be glad about the drag from the debt crisis on the euro, Mr. Papasavvas said.
Without that, the currency would be trading at “at least $1.60,” he said.
