With Greece on the brink of new elections, and the possibility of Greece leaving the Euro inching forward, we asked our Zintro experts how a Greek exit from the euro currency would effect the economies of Europe and impact global markets.
Vidia Ramdeen, an emerging hedge fund manager, says that a Greek exit from the euro will have negative then positive impacts on the global markets. “Greece is a $200 billion economy with a debt/GDP ratio over 100%. Such a scenario makes it difficult to pay back the accumulation of indebtedness,” he says. “Therefore, the exit will cause the interest rate to spike on Greece bond issues outstanding. Greece will then have to facilitate payments in drachmas, which will be of lower value to the euro. Additionally, Greek exit from the euro will cause it to fall then rise in value against G20 currencies.”
The euro zone does however benefit from a lesser valued euro, thinks Ramdeen. “The European stock markets will then focus on Spain, Portugal, and Italy given austerity and growth scenarios. The concern for these nations with Greece leaving is the spread of contagion,” he says. “The central banks are likely to use IMF/ECB funds to prevent a banking collapse in Spain and to prevent government insolvency in Portugal. The U.S. markets will continue to outperform global indices as a safe haven zone where earnings are expected to be more stable as domestic growth going forward is perceived to be stronger.”
Ramdeen says that the impact to the bond markets will continue as new bond issues will continue with indebted nations issuing at higher rates (LIBOR + 4% or 5%) and safe haven nations (Germany) issuing at rates near zero. “Bonds outstanding from stronger nations such as Australia and the U.S., even with the debt downgrade looming, will continue to see investor capital as Greece approaches an exit from the euro zone,” he concludes.
Kinuthia Karanja, an investment consultant, says that the exit of Greece from the euro currency will be positive because the Hellenic state has been the weakest link. “As the clouds of the crisis clear (albeit temporarily), we could witness a run of the euro back to the 1.60 level versus the U.S. dollar. Greece itself will be unshackled from the euro currency that has been causing an appreciation of its sovereign debt commitments in nominal terms,” Karanja says. “A return to the drachma could see a quick resolution: devaluation, default, and a return to growth. During the 1931 Sovereign Debt Crisis, Britain was able to shake off the depression by abandoning the gold standard. The euro is acting as the modern day gold standard, forcing deflation and depression upon the heavily indebted euro zone nations.”
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