What if Greece had to exit the eurozone?
The events in the past weeks have triggered a re-think of the probability that Greece would actually leave the eurozone. While before the thinking was that a Greek exit was possible but not likely, the recent elections have changed investors’ mood drastically. Over the weekend, the G8 leaders said that they wanted Greece to stay in the eurozone. However, unfortunately, the meetings did not provide any tangible solution to how this could be done.
The EUR/USD has reflected the ongoing concerns revolving around the Greek political situation. After the election results were announced on the May 6, markets opened at a price of 1.3023 at least 60 pips lower than the previous Friday’s close at 1.3088.
From there on the EUR/USD shed a further 2.92 per cent in a span of two weeks to make fresh 18-week lows when it reached 1.2642 on May 18 last week.
While instinctively, without stopping to contemplate on the repercussions, one’s reaction to a Greek exit would initially come as a relief (it’s like a black sheep is leaving the euro club and freeing the rest from their problems) – a more careful consideration of the outcome would make eurozone members think twice.
UBS have estimated that in the event of a Greek exit it would cost European taxpayers around €225 billion compared to the circa €60 billion if the Greek stayed. The above estimates only take into account the write-off of Greek debt (since Greece’s ability to repay would be significantly jeopardised if they exited) yet there are other costs to the eurozone, if this had to materialise.
If Greece had to ditch the euro to reintroduce a battered drachma they would be significantly increasing the risks of contagion to other eurozone nations, especially if investors start to perceive that deposits held in the nations “at risk” are not safe – this could give rise to bank runs and significantly expose the banking sector to another potential liquidity crisis. This could also have significant negative repercussions on global trade with Greece as well.
While it is clear that a Greek exit would come at a significant cost to both the Greek and the rest of the eurozone nations (therefore reducing its likelihood) the risks posed by such events cannot be ignored, particularly given the political turmoil currently characterising Greece. Greece is expected to face fresh elections in the coming month after the three parties that attracted the largest number of votes were unable to secure a coalition government.
Earlier this week data out of the United Kingdom showed that yearly headline CPI as at April was down to three per cent from the previous 3.5 per cent and the expected 3.1 per cent ; numbers reported for core CPI showed that it eased as well. A tamer inflation leaves the BoE with more manoeuvring space for additional easing if things don’t get any better. The IMF has in fact already asked UK authorities to consider more quantitative easing (QE) and even further interest rate cuts to boost economic growth. The GBP/USD lost around 70 pips after the data was published. For the current week, at the time of writing the GBP was down an overall -0.39 per cent against the rest of the major currencies; against the USD the GBP was -0.34 per cent lower; while against the euro it shed -0.14 per cent. Last Friday the GBP/USD marked new two month lows when it reached lows of 1.5732.
After making fresh lows at 79.01 late last week the USD/JPY managed to pare part of the previous week’s losses as speculation that the BoJ may announce further stimulus in the policy meeting that was held this week, weakened the JPY and helped the USD/JPY recover some lost ground.
Last Tuesday news that Fitch downgraded Japan’s long term rating to A+ from AA with a negative outlook also continued to weaken the JPY. The credit rating agency said that the downgrade was motivated by the government’s inability to effectively tackle public finances.
Throughout the current week we expect the USD/JPY to find price resistance at 80.08/81.09; while to the downside price movements should remain supported at 78.54/78.01.
Upcoming FX key events:
Today: German GDP & IFO, EZ PMIs, and UK GDP.
Tomorrow: EU Summit, French Consumer Confidence and US Michigan Consumer Sentiment.
Technical key points:
EUR/USD is bearish, target 1.2500, key reversal point 1.3300.
EUR/GBP is neutral.
USD/JPY is bullish, target 85.00, key reversal point 78.00.
GBP/USD is bearish, target 1.5600, key reversal point 1.6200.
USD/CHF is bullish, target 0.9600, key reversal point 0.9250.
AUD/USD is bearish, target 0.9660, key reversal point 1.0230.
NZD/USD is bearish, target 0.7460, key reversal point 0.80.
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Mr Muscat is a senior trader at RTFX Ltd.