As the Greek crisis has rattled on over the past few months the Euro has not been quite sure how to react to the uncertainties. Arguably though, Europe’s single currency has proven to be remarkably resilient to the drama unfolding in Greece this week. Whether this is because investors refuse to take the idea of a Greek exit seriously or believe the region is strong enough to withstand a default and ejection is not clear.
Formed in 1999, the euro has enjoyed a decade of stability before the Eurozone debt crisis began in 2010. Some contrarians believe the currency bloc will be stronger again without Greece. If so, the country’s ejection could even see the euro climbing again. Markets are no doubt at a critical juncture and significant euro weakness is highly likely. Risk aversion is likely to spread and despite the People’s Bank of China easing in China, we are likely to see a strong dollar, and a stronger yen, across the board in the next few days.
On a positive note, while money will be pulled out of some parts of the Eurozone during Greek exit, it is likely that it will be flowing into other parts rather than out of the bloc entirely. This effect helped to prop up the euro during previous bouts of the crisis. In particular, you would expect to see safe haven flows into Germany, the Netherlands and France. As such the net flows away from the Eurozone may not be as large as expected and could be just a bump in the road towards a global recovery.
The view is affirmed by George Grech, Head of the trade desk at EXANTE Limited “While the Eurozone constituents may change over time, I suspect, the stronger countries will want a stable (and competitive) Euro. While weaker countries have received a lot of the headlines of late, one needs to remember that the financial powerhouse, Germany, remains a staunch member of the Euro zone group” he states “I would use weakness as a buying opportunity”. Although he notes you may see a knee-jerk lower in the foreign exchange value of the Euro should Greece decide to leave the Euro, one may need to keep in mind that the value of the Euro versus the United States dollar has fallen more than 25% over the past 4 years he states, a lot of the structural deficiencies of the Euro, indeed, a lot of bad news has already been priced into the value of the Euro.
The likelihood and impact of Greece leaving the Eurozone and re-establishing its domestic currency is almost evitable. Banks and other market participants have discussed such instruments in recent years, but a market has not yet been established. The potential exit of Greece could provide the necessary catalyst for this development.