Is a Grexit a bad thing for the Euro

26 June, 2015

Tom Arnold

As another week draws to a close, the markets remain firmly focused on Greece and whether a deal will or won’t be reached in the coming days.

To the surprise of many the continual failure to reach a deal has not caused a massive spell of weakness for the Euro. It is weaker than it was and trading levels are still very good if you are looking to buy Euros – about 2 cents off the recently achieved eight year highs for those starting with Sterling – but it has not lost ground day after day as we move toward the month end deadline for the next IMF payment still unresolved, which is really quite staggering given the supposed impact of the recently named GREXIT. Why is this?

Is it simply a case of culling the weakest member of the herd, improving the overall herd’s speed, or is it something more than that? Might it actually just be better for all involved and for the markets generally if Greece did leave the Euro?

There would of course be a horrible period of uncertainty and turmoil for the markets, but the reality is that Europe as a whole is doing pretty well economically at the moment – European growth outpaced both the US and the UK in the first quarter of 2015, and with growth firmly in place in some of the other weaker economies such as Ireland, Portugal and Spain, the fears of contagion from a Grexit are all but forgotten.

Most of Greece’s debt – 83% – is owned by the Troika and as such a mass Greek default would not cause big problems for the private sector, as with the last financial crisis, i.e. there are not lots of large banks who would be exposed to the default and hence would need propping up. So while the hit to the Troika would be exceptionally large, the impact on the market would be much less so.

A foot note mention to the Greeks themselves as well – with their hands firmly back on the reins of a newly reinstated Drachma, they would be able to do all the things that the other non-Euro bloc countries have been able to do in terms of devaluing their own currency by injecting liquidity and other programmes which would enable them to get their economy stable again and look to reinstate growth from there. It would be a long and torturous road, but at least they would be the masters of their own destiny again, and in control of the things they could do to actually help the Greek people.

So maybe things are not actually anywhere near as bad as many people have thought.

But what does this mean for those of you looking to buy Euros? It means that rates might be as high as they are going to get in the coming days, and that month end is much less of terribly scary cliff for the Euro.

So if you are hanging on gleefully rubbing your hands together and dreaming of 1.50s, this is your reality check – it is well worth getting in touch with your CI account manager to discuss your specific requirements and to see if you might actually be better off looking at a forward contract to take advantage of the rates while they are still so strong.