The euro-to-US dollar exchange rate has remained stable, ranging from $1.33 to $1.48, despite the deepening of the European financial crisis that came with Greece’s first bailout package of 110 billion euros ($149 billion) in May, 2010.
The currency has survived Portugal’s 78-billion-euro rescue package, the bursting of the real-estate bubble in Ireland, which resulted in a bailout of 85 billion euros, and the world’s largest-ever debt restructuring for Greece, worth 130 billion euros.
Europe’s crisis commitment has grown to more than two trillion euros, which also includes the creation of Europe’s rescue fund, national loans to the International Monetary Fund, the European Central Bank’s purchases of more than 200 billion euros in government bonds and a trillion euros in three-year loans to banks.
The acronym “PIIGS” was coined at the onset of the sovereign-debt crisis, referring to the pool of dangerously troubled economies of Portugal, Ireland, Italy, Greece and Spain.
The three countries that have been directly bailed out – Portugal, Ireland and Greece – collectively represent only six per cent of the euro zone’s gross domestic product.
Although the euro has endured during the stormy market turmoil and traumatic media reporting surrounding the salvaging of three of the acronym’s components, it’s highly probable it will not continue to do so as the economic fundamentals deteriorate for the remaining two.
Spain alone represents more than 11 per cent of the euro zone’s GDP. It is the fourth-largest economy of the 17-nation currency region, and the 10th-largest economy in the world.
Spain’s problems are severe and border on disaster.
Smack in the middle of a recession, with a 0.4 per cent contraction of GDP following a 0.3 per cent contraction in the fourth quarter, the optimistic forecast is for a 1.7 per cent fall in GDP for 2012.
The unemployment rate in Spain rose to 22.8 per cent in 2011, and housing prices tumbled 11.2 per cent.
Meanwhile, troubled loans at Spanish banks have reached an 18-month high, and the 12-month drop in the country’s benchmark equity index, the IBEX 35, is 37 per cent.
In 2008, the index was approaching 16,000; it is now around 6,900, 55 per cent below its high four years ago.
In January, the Spanish government’s 10-year note dipped to 4.97 per cent. It is now around six per cent.
The markets are pricing in the risk and a highly probable rescue package to come.
The most serious problem in Spain is its banking system and real-estate crises, which are worse, apparently, than even those seen previously in the US.
Italy, representing 17 per cent of the euro zone’s gross domestic product, has problems of its own.
Unemployment is 9.3 per cent; the economy contracted 0.7 per cent in the fourth quarter, placing it in a recession; and the 12-month drop on the FTSE MIB, the country’s benchmark index, is 38 per cent.
Recent developments outside the PIIGS are increasing the odds of a fall in the euro.
French president Nicolas Sarkozy, a key political figure during the euro-zone crisis, finished second in the first round of the presidential election and may find himself out of office by May.
The Dutch government fell on Monday, as Prime Minister Mark Rutte tendered his resignation.
And recession, high unemployment, unsustainable debt levels and real estate crises in most member states are now being accompanied by political instability.
Credit-rating downgrades continue, with Portugal and Cyprus in junk status, Italy and Ireland threatening to join, and the main bailout fund itself losing its Standard & Poor’s AAA rating.
With the US economy humming along, and Europe possibly set to confront its most severe stage of the crisis, the euro at current levels of $1.32 looks extremely vulnerable and may be headed below its 12-month low of $1.27 – if not even lower.
Anthony Galliano is the chief executive of Cambodian Investment Management.