Forex News: Greek Economy fallen into a vicious circle

Yesterday saw the U.S. Dollar gain against all of its major counterparts in the forex online market except for the Japanese Yen as German Chancellor Angela Merkel told investors they shouldn’t expect a European Union summit due to be held in Brussels on Thursday and Friday of this week to agree on assistance for Greece.

The US Dollar gained 0.40% against the Euro overall yesterday, with the Euro closing at $1.3566. Against the Pound the US Dollar rose by 0.76% with Sterling closing at $1.5109.

The US report on existing home sales is due to be announced later today. Economists are predicting that the figure will fall for the third month in a row as unemployment remains close to 10%. Existing homes account for almost 90% of the housing market. It is believed that the extension and expansion of a federal tax credit for housing has not yet had the desired effect as the labor market remains depressed.

Across the water in Europe European Central Bank President Jean-Claude Trichet said yesterday that aid should only be given to Greece if it will include an element of stabilization for the 16-country Euro Zone as a whole. He also said it was of the upmost importance for other Euro Zone members to maintain fiscal discipline.

The the Greek Central Bank said yesterday that Greece's economy is in a "vicious circle" and this year it will contract more severely than the government says. The Bank of Greece said economic output in 2010 will fall by 2%, worse than the government's prediction of between 1.2% and 1.7%. The bank says the recession will be worse due to planned public spending cuts. The bank said that it approves of the government's strategy to bring down the country's budget deficit, but that the impact will be worse than first thought.

"The Greek economy has fallen into a vicious circle with only one way out: the drastic reduction of the deficit and debt," the Bank's annual monetary policy report says. The report warned that the Euro Zone's economic recovery remains fragile, having relied to a large extent on fiscal stimulus, which must gradually be reversed as it is leading to large budget deficits.

Greece's budget deficit last year was 12.9% of GDP, more than four times greater than the EU allows. Germany has irritated some of its European partners with its opposition to a financial aid package to help Greece overcome its debt crisis, believing that Greece can solve the problem itself.

Elsewhere in the Euro Zone, Germany's coalition government is reportedly planning a banking levy to protect taxpayers from the costs of bank bail-outs. Leading conservative politician Volker Kauder said the money would stop banks from relying on state-funded rescues.

The levy would raise "billions of Euros" from the financial sector, he has predicted. The German government dug deep into its treasury coffers to provide a €500 billion ($679 billion) rescue package to shore up the banking system late in 2008. The new proposal seems to be designed to dissuade banks from taking risks in future which would see them begging for more government hand-outs.

The International Monetary Fund (IMF) has been asked by the G20 group of wealthiest countries to examine how banks can best contribute to the costs of insuring themselves against failure. But so far countries have adopted a piecemeal approach to the issue.