What if …..Greece exits the euro zone?
The events in the past weeks have triggered a re-think of the probability that Greece would actually leave the euro zone. While before the thinking was that a Greek exit was possible but not likely, the recent elections have changed investor’s mood drastically. Over the weekend, the G8 leaders said that they wanted Greece to stay in the euro zone. 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 6th May, 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% in a span of 2 weeks to make fresh 18-week lows when it reached 1.2642 on the 18th May 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 euro zone members think twice.
UBS have estimated that in the event of a Greek exit it would cost European taxpayers around Euro 225 billion compared to the circa Euro 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 jeopardized if they exited) yet there are other costs to the euro zone, if this had to materialize.
If Greece had to ditch the euro to reintroduce a battered drachma they would be significantly increasing the risks of contagion to other euro zone 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 euro zone nations (therefore reducing its likelihood) the risks posed by such events cannot be ignored, particularly given the political turmoil currently characterizing 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.
Softer CPI increases the likelihood of easing, IMF urges UK to reconsider
Earlier on Tuesday data out of the United Kingdom showed that yearly headline CPI as at April was down to 3.0% from the previous 3.5% and the expected 3.1% ; numbers reported for core CPI showed that it eased as well. A tamer inflation leaves the BoE with more manouevering 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% against the rest of the major currencies; against the USD the GBP was -0.34% lower; while against the Euro it shed -0.14%. Last Friday the GBP/USD marked new 2-month lows when it reached lows of 1.5732.
Fitch downgrades Japan’s long term rating
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 is due Wednesday, 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.
Ahead of us Friday the EU summit is set to convene, we will wait to see what the outcome shall be.
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