Euro in need of four-leaf clover – The Australian

IRELAND, a country that accounts for less than 2 per cent of eurozone gross domestic profit, has caused big trouble for the entire region.

The once healthy country, which went into the global financial crisis with a budget surplus and a 27 per cent debt-to-GDP ratio, left the GFC as one of the world’s richest countries.

But this year Ireland is expected to report a huge budget deficit.

Its debt-to-GDP ratio could reach 150 per cent by 2014, leading many investors to wonder how the tables turned so quickly.

At the time, Ireland felt so confident about its economy that it guaranteed the liabilities of all its banks. Now Ireland is paying for that handsomely.

The country is fully funded well into next year, which means it needed a bank, not a sovereign bailout.

Now it has accepted a loan from the International Monetary Fund worth up to E90 billion.

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For currency investors, the important question is what this means for the euro, which lost 5 per cent of its value on mere speculation of a bailout.

Some experts believe the euro will now stabilise.

But based on how the euro reacted to the Greek bailout, that may not be the case. Trading in the euro since the IMF bailout was announced last week bears out these fears with the currency falling to two-month lows.

On the first trading day after Greece received a record-breaking bailout in May, the euro gave up 1c, and during the next week it lost 7c.

Between May 3 and June 7 the euro-US dollar fell about 10 per cent. Eventually, the currency stabilised when Greece faded from everyone’s minds.

Kathy Lien is director of currency research at GFT.



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