High Borrowing Costs For Greece
On Tuesday the euro fell against most major currencies as Greek worries persist and investors remain concerned about flat euro zone economic growth. Greece managed to pull off a successful T-bill sale but borrowing costs for the debt ridden nation remained high. Billionaire investor George Soros said that Greece faces a ‘death spiral’ due to high borrowing costs. At a London event organized by the well known magazine The Economists Soros said, “While it’s better than what the market is currently willing to offer, it’s still rather high. It is a question of solvency. If you start charging very high rates as the market does in anticipation of solvency then that pushes you into insolvency.” Soros also pointed out that “Concessional rates” would help Greece to address its massive debt and “fulfill their target.” Soros pointed out that “If they don’t, they have then to tighten even further, then your tax receipts go down and the economy goes further into tanking and then you go into a death spiral. That is the danger that is still remaining.” Soros said that the Greek crisis could threaten the euro and the European Union itself. Soros stated, “The consequences of Greece leaving the euro would be the disintegration of the euro. The disintegration of the euro would take a very long way toward the disintegration of the European Union.”
Slow Euro Zone Growth a Concern
The high premium investors demand to hold Greek debt indicates that investors and traders are uncertain that Greece can manage its own problems without outside aid. Slow euro zone growth remains a concern for many investors. Vassili Serebriakov of Wells Fargo in New York stated, “Even though we had a pretty good Greek auction today, people are still finding few reasons to buy the euro in the medium term. Growth prospects are still quite subdued in the euro zone compared to that of the U.S. That’s what really preventing a strong bounce in the euro.”
Permanent Damage to Euro
In addition to Soros many analysts and economists have a negative outlook for Greece and the future of the euro. Some point out that a lack of political unity will hamper Greece’s prospects. David Gilmore of FX Analytics said, “Even if we assume that Greece and the Euro zone muddle through this crisis and Greece avoids default, there should be permanent damage to the euro. Greece has exposed two key flaws in EMU (European Monetary Union)…monetary union without political union and economic divergence with one monetary policy. I don’t forecast a Greece default, just a rising cost for Euro zone for keeping Greece in EMU.”
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