Analyst Interview: David Song On Greece, Spain, And The Euro

By David Song, Currency Analyst

Is Greece going to abandon the euro? Is a civil war coming? Is the cure worse than the disease? Are we seeing the beginning of the Euro Zone's end?

Indeed, there’s speculation that Greece will ultimately leave the monetary union as Alexis Tsipras of the left wing party threatens to reject the terms of the EU-IMF bailout , and the anti-austerity movement certainly raises the risk for a euro-area breakup as policy makers struggle to meet on common ground. As the region remains at risk for a prolonged recession, European officials may continue move in their own interest, and the governments operating under the single currency may become increasingly reliant on monetary support as the new fiscal pact drawn up by the EU fails to restore investor confidence. In turn, the European Central Bank may come under increased pressure to carry its easing cycle into the second-half of 2012, but central bank President Mario Draghi may show an increased willingness to target the benchmark interest rate as the non-standard measures have a limited impact on addressing the risks for the region.

Which is the biggest concern in Europe - Spain, Hollande's France or Greece? Or the election in Germany scheduled for next year?

The ongoing turmoil in Greece certainly presents the most immediate risk for the euro-area, but Spain poses the largest threat as the country remains too big to save. As Spain embarks on a very ambitious path to get its public finances in order, tightening fiscal policy may ultimately push the economy into a deep recession, and the government may look towards the international community for further assistance as the fundamental outlook for the region turns increasingly bleak. Indeed, the nationalization of Bankia SA may just be the tip of the iceberg as record-high unemployment and falling property prices continues to drag on the housing market, and the risk for contagion may continue to materialize as the yield tied to Spain’s 10-Year debt climbs back above 6 percent.

How has the Euro performed following Sunday’s elections? Expected levels?

The Euro is struggle to hold its ground as the political shift in France and Greece undermines the EU’s effort to address the debt crisis, and we maintain a bearish outlook for the single currency as the 1.3000 figure gives way. We are looking for another run at 1.26000 as the EURUSD gives back the advance from earlier this year, but the pair may weaken to 1.2000 heading into the second-half of 2012 as the European Central Bank maintains a dovish tone for monetary policy.

--- Written by David Song, Currency Analyst