The Euro will survive the exit of Greece from the EURO zone Essay

This paper the subject of the euro surviving greece exiting the euro zone will be discussed, to be subjective we will examine both points of view and research it wither it will survive or not Voters’ rejection of pro-bailout political parties in Sunday’s election has raised the chances of Greece leaving the euro, but this unprecedented step is seen as manageable rather than catastrophic for the currency bloc. Some banks have raised estimates of the likelihood of Greece quitting the euro.

But after a year of investors shedding bonds issued by highly indebted euro zone countries and big injections of central bank cash, they said the damage could be contained. Spanish and Italian government bonds initially sold off, the euro fell and European shares slid on Monday, the first trading after the elections. However, all these assets recovered somewhat by the end of the day despite the deep uncertainty. This makes you wonder whether Greece is still a systemic threat or whether Greece is more of a Greek problem and a political problem for the rest of Europe,” said Valentijn van Nieuwenhuijzen, head of strategy at ING Investment Management. “Unless you have strong contagion into Spain and Italy, it’s unlikely to be really an issue that would undermine the whole euro zone. ” The Greek impasse, created when voters sick of austerity deprived the two main parties which back the country’s international bailout programme of a parliamentary majority, has potentially increased the risk of it having to restructure its debts for a second time.

Citi raised the probability of Greece leaving the euro area to between 50 and 75 percent from 50 percent previously. Its currency strategist, Valentin Marinov, said the bank’s economists expect it would be out within 12 to 18 months. Since Greece took the first of its two bailouts in May 2010, international banks have sharply reduced their exposure to Greek and other peripheral government debt. Greek debt is largely in the hands of the ECB as well as Greek domestic banks and speculative investors such as hedge funds which pose less of a risk to the entire euro zone. From that point of view, there is the possibility that Greece would be allowed to go its own way, whatever the Greek people choose that to be, and it could be managed by the rest of Europe,” Rabobank currency strategist Jane Foley said. “By putting up the ring-fences and limiting the exposure, the damage that Greece could do is far lessened. ” As Greece, Ireland and Portugal successively took bailouts, European institutions increased the firepower of their rescue fund, in an effort to calm markets and the European Central Bank made available 1 trillion euros of cheap three-year funding.

One fear haunting markets has been that if one country left the euro and was able to devalue its currency to regain competitiveness, other weaker members might follow. “Our view is that Greece will not trigger such exits. In response to any escalation in market concerns euro zone policymakers and the ECB will take steps to preserve the remainder of the euro zone and keep it in one piece,” Citi’s Marinov said.

Similar fears of contagion were raised in the year before Greece restructured its debt, imposing huge losses on private creditors. However, the event itself in March made few waves in global financial markets. ORDERLY EXIT That does not mean there would be no market impact. The premium investors demand to hold peripheral debt rather than German benchmarks would rise and the euro would fall, analysts said, though Marinov said it could strengthen to $1. 40-$1. 45 from around $1. 30 now within 6-12 months of an orderly Greek exit.

Given the political uncertainty over Greece’s future in the euro zone, market players say it is difficult to position for a possible exit and that there are few signs of investors pulling out of the common currency with this scenario in mind. “Even if I knew what I wanted to do, I’m not sure how I’d do it,” said one bank’s London-based head of foreign exchange sales. While markets’ focus has been primarily on Greece, some said the French presidential election victory of Socialist Francois Hollande, who has argued against cutting deficits too fast and for a greater emphasis on growth, could be more significant. It is difficult to see a major economic or financial impact coming from Greece having to default or being forced out of the euro but clearly the political dimension in Europe is changing and it is coming out of France,” said Sanjay Joshi, head of fixed income at London & Capital, a $3. 5 billion fund that no longer holds Greek debt. On the other hand, After the German elections are over, the fuller implications of this signal can be fleshed out. By that point Greece’s crisis weary population will be ready for neither another year of substantial austerity cuts, nor for yet another year of recession, so a solution will need to be found.

If the debt pardoning cannot be great enough then “Grexit” will be on the table as a contemplatable solution. Which brings us to the world of the investor, and how the Catalan and Greek issues could affect the market for periphery government debt in the future, or indeed the trajectory of conversion risk in the euro area. Most observers are agreed that an independent Catalonia would be out of the EU and out of the Euro. But have they thought about the implications of this conclusion? Without Catalonia, for example, how on earth would the Spanish State ever be able to meet its obligations on the growing mountain of state debt?

Secondly if Catalonia was out of the EU, it would logically also be out of the euro, and the Catalan financial sector without access to euro-system liquidity. But the Catalan financial sector, like the rest of the financial sector in Spain is surviving on life support from the ECB (something like 75 billion euros worth in Catalonia alone), so unless you want systemic institutions collapsing in Europe… The biggest risk here is that both the Catalan and the Greek issues could come to a head just after the German elections, and the combined effect would be a very strong challenge to Euro continuity.

So today as leaders in Madrid, Berlin and Brussels contemplate how to react to the latest vote in Barcelona perhaps they would do well to bear in mind the words of American singer Janice Joplin, “freedom is just another word for having nothing left to lose”. The potential for a run on the banks increased with the admission by the country’s president Karolos Papoulias that up to €800 million ($900 million), was pulled out of the banks in a single day. It is a tiny slice of total deposits but a trend, Papoulias noted, that could create “fear that could develop into panic. Greece, which is facing its fifth year of recession, will go to a second election June 17 after its May 6 voting left no single party with more than 20% support and negotiations to create a unity government failed. An interim government has now been sworn in. An unplanned exit from the eurozone could cost up to $1 trillion, according to Doug McWilliams, of the Centre for Economics and Business Research. McWilliams noted: “The end of the euro in its current form is a certainty.

A currency with the name euro may survive but even if it does it will be radically transformed. ” Negotiations between Greece and its lenders might seem a game of chicken, and analysts remains skeptical the end-game is near. But the odds are increasing — gaming house Ladbrokes even stopped taking bets on a Greek exit from the eurozone — despite the legal, financial and political difficulties. CNN explains how it could happen. Greece could be forced to exit the European Union, rather than just the common currency itself, because one comes hand in hand with the other.

The European Central Bank has the exclusive right to issue euro notes, for example, so any move by Greece to print its own currency would immediately put it in breach of the treaty. Changing the treaty would take some time, so a more likely maneuver is an agreement between euro nations on when and how they would boot Greece out of the bloc. According to Charles Proctor, partner at Edwards Wildman Palmer, “the dam has burst, because so many people are now talking about [an exit]. It is not a possibility that can be ignored. However the legal difficulties mean “any solution would have to take place effectively outside this document. ” A withdrawal from the eurozone by Greece “would be breach of the treaty without any question,” Proctor added. “But these things happen. ” Greece could revert to the drachma — the currency it had before entering the euro in 2001 — but there is also speculation it could operate with a Greece-specific euro until a full switch can take place. If Argentina is used as a guide, this could be announced over a weekend.

The banks could then remain shut for a fortnight while the currency transition is bedded in. At this point capital controls would need to be in place to ensure money in the country stays there. This could be done in co-ordination with other euro countries, or unilaterally. According to a Bank of America/Merrill Lynch note, Greek banks have lost 30% of their private sector deposits since their peak in late 2009. Such capital flight is likely to be increasing and the fear — as articulated by Papoulias — is that an emotional response to the crisis will create even greater problems.

As UBS’s Paul Donovan, notes, “talk of firewalls and guarantees disappears in a puff of smoke if the challenge for banks is not liquidity, nor solvency, but an existential crisis. ” The new currency would be worth significantly less — estimates put it at perhaps 50% — than the euro. According Bank of America/Merrill Lynch, the country could then issue IOUs to pay salaries and recapitalize the banks. This, however, would risk the creation of a “shadow currency. ” The note adds: “How long Greece could be within the euro and live with its own internal currency is an open debate. Once the new currency is in place, mortgages to Greek banks would likely be repaid in drachma, while repayments of mortgages to foreign banks may have to be renegotiated. The biggest issue could be foreign banks’ loans to major Greek businesses. Debt which was previously due to be repaid in euros would have be renegotiated in drachma. Legal disputes are likely to ensue as creditors battle to get back as much money as they can. Payback time Creditors attempting to squeeze their money out of Greece could be out of luck.

The International Monetary Fund and European Central Bank are the country’s most senior creditors and defaulting on these debts would be politically unpalatable. But there are precedents: Sudan, Zimbabwe and Somalia, for example, remain in arrears to the IMF. Private creditors have already taken 50% losses on their investments in Greek debt but are likely to face further reductions in repayments. Money owed to Greece’s eurozone peers, via the bailout fund, would likely be up for some ferocious negotiation. The flow-on effect The so-called “contagion effect” remains the greatest fear.

Allowing one country to exit the euro opens the floodgates for others to follow. This risk will push up the premium attached to buying sovereign debt of troubled eurozone economies — such as that of Spain and Italy. According to Michala Marcussen, of Societe Generale, the direct costs of Greek euro exit would be huge for Greece, but manageable for the rest of the bloc. “Our concern is contagion,” she wrote in a note. The note said a forceful policy response would be needed in the case of a Greek exit, such as further strengthening of the bloc’s bailout fund.

A Greek exit could also trigger shifts in geo-political influence, as countries such as Russia may step up with financial assistance. According to James Nixon, of Societe Generale: “The risk is we may lose Greece from the Western sphere of influence. ” Is Greece actually going to exit the euro? The next few weeks will be vital for Greece, and the future of the eurozone. Much depends on the results of the new election. Greece’s Syriza party — which wants to remain in the eurozone but does not support the bailout program — has thus far reaped the benefits of voter frustration with the austerity measures.

It bumped out mainstream party PASOK to come second in the May 6 election, with almost 17%. Opinion polls indicate it could come first in the next election. New Democracy, which supports the program, narrowly won the May 6 election with almost 19% support. It could get a boost if sentiment shifts and fear of a euro exit drives Greeks back to the mainstream parties. If this happens, the crisis could ease. Economists remain unconvinced an exit is the next step. Nixon believes the “huge poker game” between Greece and its creditors is set to continue. “There is still some distance to the last chance saloon,” he says.

If it did, the consequences could be dire, Donovan notes. He points to the bankruptcy of Creditanstalt, Austria’s largest bank, in 1931. “That was the main cause for the Great Depression. And this is the same sort of thing,” he says. Economic shakedown A new currency would take some time to find its true value, as markets adjust to Greece being outside the eurozone bloc. In Argentina’s case, its break with the U. S. dollar peg in 2002 — which devalued the peso by 30% — sank its economy, with 60% of Argentines under the poverty line, according to the CIA Factbook.

However, the economy then rebounded around 8. 5% annually for six years. If Greece unshackles its currency it will become a more competitive exporter and an attractively cheap tourist destination. But Greeks, who have suffered rising unemployment, brutal austerity measures and protests which have claimed lives, will be forced to pay higher prices for imported goods. The country’s economy — which accounts for just 5% of the European Union’s economic output and relies on agriculture and tourism — would likely take years to recover.