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Euro euphoria short lived

Euro euphoria short lived

Investors still remain nervous despite the 100 billion recapitalisation package for the Spanish banking sector. In fact we saw Spanish bond yields rise to around the 6.5 percent mark yesterday. We also heard comments from the Bank of England that more stimulus was likely to bolster our own economy.

Talking to CNN on Tuesday Cristine Lagarde (head of the IMF) said that the Europe had three months left to sort out its problems, otherwise a breakup would be inevitable. Last week billionaire investor George Sorros indicated a similar deadline.

The IMF head advised a gradual and continuous reduction of the EU countries’ fiscal deficits, emphasizing that it does not have to be done through harsh austerity measures. Cristine Lagarde refused to predict whether Greece would leave the euro, claiming that “It’s going to be a question of political determination and drive.”

Nevertheless, European governments have already started preparations for the possibility of a Greek exit, as uncertainty is growing before the Greek elections scheduled for June 17. Some of the measures considered by the Euro Working Group include the suspension of the Schengen agreement, imposing limits on cash machine withdrawals and capital controls in Greece.

European officials have been having talks over the last few weeks in order to agree upon the strategy should Greece exit the euro, although they emphasize that it may not happen at all and that the plans being worked out are more a precaution than anything else.

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