Portugal, Ireland, Italy, Greece and Spain have been labelled the PIIGS of Europe for some time (Italy were added later than the initial PIGS label) due to extreme economic uncertainty and high levels of debt. Debt in each of these countries had been threatening the Eurozone and in three cases now we have seen bailouts (fortunately for the Eurozone it has been the three smaller nationes – Greece, Ireland and Portugal, in that order). Now it seems that Greek debt is really threatening, their credit ratings continue to be cut (they are now the worst out of any country globally) and extremely strenuous austerity measures are failing to raise the necessary funds for their expensive, short term loans. We progress that the Greek Parliament only recently survived a vote of confidence following riots from the austerity measures. As a note of just how severe these measures are, it has been reported that petrol prices in some areas of Greece has risen 60% since the start of the year! Right, so at least we understand why they are rioting..
Is there any way out for Greece?
Well the second round of austerity measures that they will need to make fit in order to secure their second round bailout is likely to be even more hard hitting. Whilst their are riots already in the country your guess is as good as mine in terms of how they are going to get out of this rather precarious political situation. However, economically Greece have dug themselves such a hole that such extreme measures are their only chance to avoid defaulting on their debt. The politics aside some analysts expect that a Greek default is simply a formality anyway. Personally I have very strong doubts against the presence of Greece for the medium – long term in the Euro.
So what if they default?
In terms of what happens to the Euro we are stepping into fairly unknown territory. There is a lot of talk regarding Greece being forced to go back into the Drachma, and the Drachma losing up to half of its’ value overnight. Whilst this is obviously fairly tragic for anyone with funds in Greece any default will resonate throughout the Eurozone and indeed the world. France, Germany and the UK are the most exposed to Greek debt (in that order) so these countries will be immediately set back, and you could expect the Euro to suffer should the Greeks default, it is also likely GBP will suffer due to both their own exposure and speculators perception of Sterling as a ‘risky’ currency. Other currencies that may lose ground in particular are the AUD and NZD that suffered in 2008 when the Lehmann Brothers collapsed.
So who is likely to gain?
‘Safe haven’ currencies are likely to be the main beneficiary here, in particular I think the US Dollar will really gain. As Oil and Gold are priced in Dollars, and the US is the largest worldwide economy it is seen as a safe bet to investors and the EUR/USD is the most commonly traded currency pair. Both currencies are at fairly opposite ends of the spectrum so speculators will regularly move funds between the two, if the Greeks default I can see funds rush back to the ‘safe’ Dollar. I would also expect the Swiss Franc (which is at record highs against most currencies) and the Japanese Yen to gain.
In conclusion it does look increasingly like when and not if the Greeks will default, and this is very likely to cause massive volatility and euro weakness. The closest thing that we have to compare this to worldwide is the Lehmann Brothers collapse which changed the face of the currency markets overnight.
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