As the Greek debt negotiations continue to be in a deadlock, the term “Grexit” is hitting the headlines again. The biggest sticking point seems to be that the Greeks don’t want to accept any austerity measures. The newly elected Greek government is saying that they’re obligated to represent the Greek people’s voice, and also reminding the EU that a Grexit will threaten the stability of the eurozone. Is this really true?

Back in 2012 when Greece was defaulting, the market panicked and was very volatile. Today, while the market is still counting on a last-minute deal being struck, it is a lot calmer in pricing a possible Grexit.

First, even with Greek negotiations failing and time running out, the euro isn’t falling. It’s actually creeping higher, with more buying the euro. People believe that the eurozone economy minus Greece will be a lot stronger. Meanwhile, Greece’s currency will probably collapse under its debt level.

Second, bank deposits from Greece are leaving the country rapidly and will probably continue to do so. Since 2009, more than 100 billion euros of deposits have left Greece, and the losses have deepened significantly since January, when Prime Minster Alexis Tsipras took office.

Just this week, another 1.9 billion euros left the country. Talks of possible capital controls for money exiting Greece are being discussed and the Bank of Greece has had to warn about perils of failing to reach a deal.

Third, the British pound is benefitting from money exiting the euro. The pound has strengthened close to 2% against the euro in just one week because the U.K. is deemed least exposed to Greece and has a stronger free financial market.  A new term “Brexit” has emerged, but any move there would be by choice, and not by force. So what does this all mean?

My View: The Tsipras government is saying they are protecting the people’s standard of living by rejecting austerity measures. But a Greek default will definitely result in a much worse standard of living than today, with a vastly devalued currency, high inflation, and interest rate spikes. Yet the government that the people elected continues with its brinksmanship in negotiations with creditors. Ultimately it is the Greek people that will suffer the most. Savvy Greek investors are already taking their money out of the country, possibly putting them into GBP accounts, to hedge against this scenario. 

The information in this report was compiled by the staff at City National Bank from data and sources believed to be reliable but City National Bank makes no representation as to the accuracy or completeness of the information. The opinions expressed, together with any estimate or projection given, constitute the judgment of the author as of the date of the report. City National Bank has no obligation to update, modify or amend this report or to otherwise notify a reader in the event any information stated, opinion expressed, matter discussed, estimate or projection changes or is determined to be inaccurate. This report is intended to be a source of general information. It is not to be construed as an offer, or solicitation of an offer, to buy or sell any financial instrument. It should not be relied upon as specific investment advice directed to the reader’s specific investment objectives. Any financial instrument discussed in this report may not be suitable for the reader. Each reader must make his or her own investment decision, using an independent advisor if prudent, based on his or her own investment objective and financial situation. Prices and availability of financial instruments are subject to change without notice. Financial instruments denominated in a foreign currency are subject to exchange rate risk in addition to the risk of the investment. City National Bank (and its clients or associated persons) may, at times, engage in transactions in a manner inconsistent with this report and, with respect to particular securities and financial instruments discussed, may buy from or sell to clients or others on a principal basis. Past performance is not necessarily an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.