{"id":210536,"date":"2010-01-21T16:19:48","date_gmt":"2010-01-21T21:19:48","guid":{"rendered":"http:\/\/www.businessinsider.com\/morgan-stanley-greece-is-a-trojan-horse-that-threatens-the-euro-and-the-credibility-of-europe-itself-2010-1"},"modified":"2010-01-21T16:19:48","modified_gmt":"2010-01-21T21:19:48","slug":"morgan-stanley-greece-is-a-trojan-horse-that-threatens-the-euro-and-the-credibility-of-europe-itself","status":"publish","type":"post","link":"https:\/\/mereja.media\/index\/210536","title":{"rendered":"Morgan Stanley: Greece Is A Trojan Horse That Threatens The Euro And The Credibility Of Europe Itself"},"content":{"rendered":"

Morgan Stanley (MS) is out with a very sober analysis of what the Greek situation means.<\/p>\n

The report, put together by analyst Emma Lawson, describes Greece as a “Trojan Horse” that threatens not just the euro, but the credibility of the ECB itself if the central bank finds itself unable to punish fiscal miscreants.<\/p>\n

The risks to the EUR from the events in Greece arise from a
number of different factors. In summary, however, it boils
down to credibility: The credibility of the Greek government in
meeting their targets, the credibility of the EU institutions to
deal with non-compliant states and the credibility of the EUR
itself. 
In periods of fiscal deterioration, the EUR has typically
benefitted from the understanding that all countries would
adhere to the conditions of the Growth and Stability Pact
(GSP) envisioned by the European Treaty. The GSP requires
that they would need to employ deficit reduction programs.
The fact that Greece had yet to implement reduction
programs, and now evidence that historical financial statistics
were not accurate, calls this market assumption into doubt. <\/p>\n

Exhibit 1 shows the EUR’s performance against rating agency
downgrades of European countries. Often, the agency
downgrades come after the market has built in expected fiscal
deterioration and the currency can rally. Since 2009, the
increased concerns surrounding the euro area mean that
EUR continues to underperform after a round of rating
downgrades. <\/p>\n

\"eurousddowngrades\"<\/p>\n

The weakness may arise as originally the market assumes
the rest of the euro area will take on the liabilities of the non-
compliant state. In the ten years from the beginning of the
common currency until the current challenges, the ability to
service debt or other countries to absorb debt if necessary
was unquestioned. The willingness to do so was also
assumed. <\/p>\n

What has changed and is perhaps not fully priced into the FX
market is the unwillingness of other states to provide funds in
the event they are required by Greece. This is slowly
becoming clearer. The ECB President has noted that the bank
will not change its collateral rules for non-compliant states,
while various finance ministers have implied that they will not
bail Greece out. The euro area’s institutional framework
actually sets out that no bailouts can occur. Article 125 states
that “The Union shall not be liable for or assume the<\/p>\n

commitments of central governments…”
Many investors believe that Greece will be bailed out; their
resolve is now being tested. As this belief in the absorption of
liabilities is tested, it is likely to pressure EUR and lead to
further EUR weakness on either added negative news on
Greek debt or in the event of further rating downgrades.  <\/p>\n

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