Markets Bit

Serial Bailouts Mean Diminished Euro

Barron's |

In Brief...

THE EURO IS NOT DEAD, but it may be fatally wounded as a viable alternative global reserve currency. Almost immediately after Ireland acceded to a bailout from the European Union and the International Monetary Fund, the international bond markets have set their sights on Spain as the next crisis point, sending its government bonds plunging and the cost of insuring its sovereign debt soaring. Notwithstanding the prospect of serial bailouts, contagion spread almost immediately from Ireland to Spain. "With Ireland moving toward bailout, bond vigilantes apparently have decided to skip over the Portugal domino and target Spain," writes Uwe Parpart, Cantor Fitgerald's chief economist and strategist for Asia.. "Moody's says Spain is on more solid ground than Ireland. Spain is vastly more important than Greece, Ireland and Portugal because its economy is 65% larger than the other PIGS and accounts for 11% of eurozone GDP, according to a recent Credit Suisse report. So, the euro may lurch from crisis to crisis with serial bailouts, as Chancellor Merkel describes them. While its exchange rate could rise at times, mainly because of America's financial vices rather than Europe's virtues, as long as the uncertainty created by serial bailouts exists, the euro is unlikely to attain the status of a reserve currency equal to the dollar.

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