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What Will The G8 Do About Greece?

May 22, 2012 9:51 AM ET
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Forex Gump's Blog
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Were the G8 leaders able to form concrete solutions last weekend, or was the meeting just an opportunity to watch the UEFA Champions League final together?

Last weekend, the leaders of the U.S., the U.K., Japan, France, Germany, Italy, Russia, and Canada all huddled at Camp David in Maryland, U.S. to talk about the state of the global economy. In short, they talked about what the heck they're going to do with Greece.

For the past couple of weeks, the possibility of a Greek exit from the euro zone has been weighing on risk appetite. The country's inability to form a solid government led to speculations that Greece will default on its debts and left market players to speculate on a Grexit.

The main point that we can take away from the statements released is that the G8 leaders all agree that keeping Greece in the euro block is important for global stability and recovery. Apparently, the leaders are ready to take all necessary steps to strengthen their economies and fight financial stresses.

Unfortunately, the road to recovery might not be so simple. The G8 statement also stressed the truth that measures towards recovery are not the same for each of the G8 economies. In fact, British Prime Minister David Cameron even said that growth and austerity are not alternatives in the euro zone's case, and that fast actions are needed.

It doesn't help that G8 leaders are still divided and unsure about the best plan of action to take. Newly-elected French President Francois Hollande believes that policies pushing for economic growth will eventually pull Greece out of the rut, while German Chancellor Angela Merkel insisted that austerity measures are the way to go.

From the looks of it, Germany seems unwilling to soften its stance on austerity despite calls to boost euro zone economic growth. As U.S. Treasury Secretary Timothy Geithner mentioned during last month's IMF meeting, debt-ridden nations must avoid too much spending cuts that could dampen economic growth, shrink tax revenues, and widen government deficits down the line.

At the end of the day, G8 leaders were all bark and no bite. Although they did attempt to reassure the markets by reiterating their pledge to support global economic growth, they weren't actually able to agree on a concrete plan of action, leaving the fate of Greece and the euro still uncertain.

Despite this lack of resolution, it appears that the G8 summit was able to revive confidence in the markets as we witnessed risk rallies on Monday. Not only were higher-yielding currencies able to snap out of their losing streaks, equity indices also rebounded from their worst weekly performance for this year.

At this point, it seems that any kind of positive news could spur risk appetite as market participants are desperate to see light at the end of the tunnel. Whether this risk rally resulting from the G8 summit would last or not remains to be seen, as the slightest bit of negative news from the euro zone could also force the selloffs to resume. Be careful out there!

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