Currency Trader Chat Room
The decision by the European Central Bank (ECB) on January 13 to keep its benchmark repo interest rate at the record low level of 1% highlights the dichotomy lying at the very heart of the Eurozone, which will ultimately lead to further debt bailouts for Portugal, and Spain, at the very least – following those for Greece and Ireland - and the likely break-up of the Euro currency itself, possibly as early as this year (Jean-Claude Trichet’s last as ECB President), thinks Naheem Majid, chief operations officer for Sinaco Global Trading, in London.
In this respect, he underlines, the January 13 auction of Spanish five- year bonds – which paid an average yield of 4.542% on the new securities, up from 3.576% at a similar auction in November 2010 – is a precursor of the rising debt spiral in which the southern states of the Eurozone (Greece, Portugal, Spain, and Italy, for example) will increasingly find themselves, but which the northern Eurozone states (particularly Germany) are relatively powerless to prevent, given that continued low interest rates will further stimulate growth, which will lead to an inflationary spiral there instead.
In fact, inflation expectations, as measured by the difference in yield between five-year German nominal bonds and similar- maturity index-linked debt, more than doubled since the middle of 2010. Moreover, the room for maneuvering for Eurozone member countries appears to be severely limited, with little in the way of new initiatives likely to result from the next meeting of the European Council to take place on February 4 this year.
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