The Greek debt crisis which has been unfolding for last 2 months has started looking like having a contagion effect on other European economies like Spain, Portugal and Ireland.The recent down grade by S&P for Greece to junk status and Portugal from A+ to A- looks like starting a contagion effect. A massive rescue package announced by European Central Bank this morning will have a calming effect on the markets as well as the countries’ abilities to service their debts in short to medium term range.
The key issue is will this crisis have a fundamental effect on the European Union as well as Euro.Since EU is the largest trading partner for India and also destination for a large no. of Indian Small and Medium Enterprise (SME) exporters the next 6 months will be critical.
While the rescue package amounting to around USD1 trillion looks like a massive response to the problem, the fundamental economic issues which started this problem still remain the same. The economics of countries like Greece, Spain, Portugal and Ireland are over leveraged, have massive amount of  high cost debts, high wages coupled with low productivity. Since these countries do not have any leverage about pricing their goods and services, it is very difficult for them to control their fiscal deficits.
The Indian exporters need to be cognizant of these issues and need to be aware of the direction in which euro will move.
In our analysis Euro will keep getting weaker over next 1 year as European countries will have higher debt  and an increasing pressure to restructure their economies. Thus hedging rupee – euro will be critical as euro is seeing a minor rally after announcement of the rescue package. This is good time to lock into  forward and future contracts as euro pricing will see a large amount of volatility in the coming months.
The standing of Euro being the second reserve currency in the world is over. Thus the dollar will gain more and get stronger against
the rupee over next 6 months.Coupled with a fast recovery in US, the exporters who pre dominantly export to Europe need to look at the US markets again. Exporters can wait to lock into any rupee dollar forwards and futures as dollar will get stronger.
What the Indian exporters need to look at critically is the way rescue package is implemented in Europe as unlike US, the former is politically dis united where rich countries like Germany etc do not want to fund weaker economies for an indefinite period. In case the market feels that rescue package is not being implemented with all the political will, the euro will go into a tail spin.