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The headlines around the credit downgrade of France and other European countries took over the news, and partially covered the breakdown of the Greek PSI talks.

Yet this isn’t the only issue brewing in the Hellenic Republic. Is the cataclysmic fall coming soon?

When rumors of a French downgrade started to float, the option of a two-notch downgrade (hinted earlier by S&P) seemed like the worst case scenario. Well, France was downgraded by only one notch, and this helped EUR/USD stabilize and return back above the 1.2660 support line.

This partial relief from France overtook the news about two notch downgrades for Italy and Spain and also the Austria’s downgrade – another loss of AAA needed for the EFSF.

Greek PSI Breakdown

The bigger news came from Greece: the talks about a 50% “voluntary” haircut for private bondholders (PSI) fell apart. Banks are discussing this issue with Greece since this was decided upon, in two EU Summits at the end of October.

In the meantime, a 50% haircut seems insufficient. Unemployment is up, industrial output is down, and tax revenue continues shrinking. It’s also important to remember that a 50% haircut doesn’t mean a 50% reduction of Greek debt.

A significant part of Greek debt is held by public organizations: this includes the tranches provided so far through Greece’s first bailout program (IMF and EU), and also the bonds held by the European Central Bank through the SMP program.

But even the 50% private haircut is hard to materialize, at least for now. The agreement is part of the second bailout program. Without it, Greece is expected to run out of cash in mid March, and default.

Greek Bank Trouble

BlackRock Solutions published its long awaited report on Greek banks, also on Friday the 13th. They found that the banks are in a shortfall of 15 billion euros – worse than expected.

The next step in this process is a review of the report by the Bank of Greece, with results expected in February. Do Greek banks really have this time?

The growing chances of a default could scare off more depositors and trigger more withdrawals, worsening the situation of the Greek banks.


Euro/dollar closed the week lower, but it could have been worse. When these events will be digested, an attack on the next support level at 1.2587 could happen.

For more on the pair, see the euro/dollar forecast.