The euro tumbled at the start of trade this week after the Eurozone summit on Sunday failed to produce any coordinated response to the growing financial crisis in Eastern Europe. Instead, EU officials led by German Chancellor Angela Merkel opted for out for “case by case” country solution, refusing to provide any specific details at the present time.
The disarray in the European Union only served to stoke fears that the ultimate euro bear scenario of a fractured and fragmented Eurozone could soon become a reality. The great danger of ignoring the problem centers on the fact that Western European banks stand to lose the most, should Central European economies go into tailspin. With nearly $400 worth of consumer and corporate debt due to be rolled over this year, EZ financial sector could face massive write downs if consumers and corporate in Eastern Europe default on their mortgages and lines of credit most of which are denominated in Euros or Swiss francs.
With Eastern European currencies off by nearly 50% against the EUR/USD it seems highly improbable that borrowers in those nations will make good on their debt. Therefore, the lack of progress at this week-end’s meeting may only delay the inevitable and without any serious and substantial renegotiation of current obligations defaults are likely to skyrocket putting yet more stress on the already strained European banking sector.
Little wonder then that EUR/USD continues to be pressured by this nagging problem, which if left untreated could create colossal losses in EZ capital markets. The battle in the EUR/USD now centers on the 1.2500 level which not only serves as strong psychological support line but also represents 2009 lows.
Option related defense of the level is likely to keep sellers at bay for the time being, but only temporarily so. Unless EZ officials begin to make quick progress on this issue the deteriorating economic conditions in Eastern Europe threaten to explode into a full blown financial catastrophe. With the pair so tantalizingly close to the 1.2500 barrier it appears to only a matter of time before that key support level gives way.