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.
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