Europe's Debts as Ponzi Scheme

EUR/USD still dangles within the range, although with regard to EUR/CHF pair, a large-scale recovery took place - SNB is trying to hold the target range of 1.050-1.1000
The idea of issuing debt obligations as a remedy for the standard of living decrease came into existence more than 30 years ago. If a country spends more than it can collect in the form of taxes, then borrowed funds are used for financing of social programs. That is always served under the guise of temporary measures; however, when repayment time comes and there is no money, the easiest way will be to print money and take another loan that is not secured against anything. Today, practically each country's sovereign debt is higher than its GDP, and that global monster has been growing by trillions of dollars each half a year. Central banks are forced to keep rates close to zero or below; however, there is no solution yet for the problem of present debts. Meanwhile, bubbles keep on growing trying to compensate each other. The profitability of Eurozone monetary sector for 2014 went into minus, and ECB's policy has contributed to that. Even euro growth for the last week can't change the picture yet: 12-month German promissory notes showed (-0.1725%), and French (-0.049%) at the last auction. If this tendency continues, euro perspectives will be dramatically negative. Pressure from commodity market is increasing, and adjustment growth of oil quotes still leaves euro indifferent.

However, the current week can shift macro-statistics releases to the secondary role. Now, it is very difficult to recognize that the decision to bring Greece into Eurozone was irresponsible, and the major part of guilt rests with the French for their past propaganda. The base part of Greek debts funding falls on German and French banks that, although they gained a huge profit from such mediation, absolutely disagree with the stop of payments.

Today, the profitability of 10-year Greek bonds grows due to political threats. Poverty-stricken post-election Greece is trying to escape from debt in the amount of 175% of its GDP by widening a dissention among its creditors. While making attempts to put pressure on large and demanding creditors, it is holding permanent negotiations with more loyal ones (for instance, with France and Great Britain) regarding rescheduling and adjustment of repayment conditions. However, critically large debt amounts are actively ignored by new Greece and, even if the national debt were completely repaid, the transition to a balanced budget would involve significant economy combined with active work, which this prodigal and passive country has neglected for a long time.

Declarations that Greece needed a "new contact" with Europe and ECB's threats to cut off the source of financial help for the new government only played up to the debtor. The political damage from this step can be more costly than money. All that is taking place on the eve of ECB's meeting on Wednesday and before the planned European summits for February. ECB must discuss the conditions of the program for prompt supplying of liquidity to Greece, since only ELA's urgent help can keep Greek banks afloat. ELA will run an adjustment every two weeks only under the condition that the country will strictly stick to the terms of the program made by the "trio" of creditors.

Publications with regard to euro-QE details and euro development forecasts for this year are expected. If a precedent for financial concession is made for Greece, then, sooner or later, all of the peripheral Europe will demand the same. It depends on today's decisions if the European Union will hold out in the fight with debt parasites or will give in until it falls apart. Any comments can cause speculative surges, since the market fluctuates between the statements of "overcoming difficulties" and "the split of Euro zone is inevitable". Dollar continues to demonstrate amazing stability despite past FOMC protocols; however, this week, it will be extremely sensitive to any macroeconomic events, especially to the presentation of the US financial budget for 2015.

Large options that closed for euro/dollar at the price of 0.1645 in the volume of €200 mln, and EUR/JPY at the price of 133.00 with the volume of €330 mln can help shape new turn-around levels. EUR/USD still dangles within the range, although with regard to EUR/CHF pair, a large-scale recovery took place - SNB is trying to hold the target range of 1.050-1.10 with the help of non-public interventions. Although in order to have a new downward movement, it is necessary to pass 1.1250/75 zone clearly, the further fall of EUR/USD downward is the issue of the nearest future.

Author: Navsher Bartash,
ForexChief Currency strategist