Euro Dip Today Is Tomorrow's Rally

A number of media outlets have pointed out that the euro was slaughtered earlier today when a minor Chinese official said that the sovereign debt probably will become a plague which will reach beyond the Greek borders.

According to MarketWatch, “The euro’s overnight slide came as Zhu Min, deputy governor of the People’s Bank of China, said the Greek debt crisis was the ‘tip of the iceberg’ for the euro zone. ‘I don’t think Greece will go bankrupt because it’s still relatively small, but we don’t see decisive action that tells the market, We can solve it, we can close it, so the market is very volatile,’ Zhu reportedly said. He called Spain and Italy the ‘main concern today.'”

The movement in the euro is good for a day, like fresh fruit.

There is every reasonable chance to think that Greece will get aid from some combination of the large European nations, particularly Germany, and the IMF. The cost of Greek debt CDS will promptly fall and the issues behind the concern about the euro will dissipate.

The argument for ongoing pressure on the euro is that Spain, Portugal, or Italy will follow Greece, each with a credit crisis of its own. A “moral hazard” may be created by a Greek bailout. The costs of aiding three or four European nations simultaneously would be too great for Germany and France even if they were inclined to step in. Alternatively, Spain or Italy could withdraw from the 16-nation euro alliance and devalue their own currencies or simply default on their national debt obligations.

CDS spreads on countries outside of Greece do not indicate that the market shares China’s concern. Even if one of the other European nations moves into the “deeply troubled” category; that day is a long way off.

The moment the Greek bailout is launched, the euro will rally – at least for a day.

Douglas A. McIntyre