What are the implications of a potential Greek exit?

Wednesday, February 18, 2015
On the one hand, markets are nearing record/multi-year highs given the ECB’s €1.1tn QE programme which has given some much needed liquidity and encouraged further risk taking as investor confidence builds. It’s reassuring for investors to know that the world’s second largest central bank is backing you in case things take a turn. This has and will continue to provide some upside to higher yielding markets as the ECB adds the more attractive emerging market debt to their balance sheet. We’ve already seen some upside in BRL, TRY, ZAR, MXN and this general trend will continue throughout the year as the asset purchasing programme gains pace leading to a general improvement in risk appetite.

However, if Greece and its creditors fail to find a debt solution then a potential Greek exit, while not likely to significantly damage the economic stability of the eurozone given how small their economy is, will have far reaching implications sentimentally. Thankfully, Europe is in a better position than in 2012 when the initial threat of a Greek exit surfaced, with bank balance sheets a lot healthier now. But contagion risk could spread quickly and cause a market slide as investors lose confidence.

It could completely undermine the single currency and possibly prompt other indebted nations (Spain/Portugal/Italy) to re-evaluate their own position in the union. Short term, the euro would come under considerable pressure and not even Germany’s optimistic economic outlook could be enough to instil confidence among investors.

Knee jerk reactions are likely to be capital flight to the US where markets are continuing to offer investors attractive returns. Both the USD and JPY could make considerable gains against the EUR as a general flight to safety prompts investors to pull out of the eurozone. We could see substantial spikes for gold despite the waning investment demand outlook for the precious metal as investors look to it for a store of value. US, UK, Japanese, German treasury yields would decline as investors rotate out of stocks and into bonds. ECB president Mario Draghi has continually reinforced the message that the central bank will do “whatever it takes” to support the euro; however, he was late to the party with QE which could see him drag his heels in dealing with the potential fallout from a Greek exit. 

EUR continues to trade near multi-year lows

EUR Curncy Euro Spot 2015 02 18 10 51 00

10 year German government bond yields remain under pressure

GDBR10 Index Germany Generic Go 2015 02 18 10 50 27

However, EM currencies benefit from the ECB QE programme,  notably MXN...

MXN Curncy Mexican Peso Spot 2015 02 18 10 49 37

...and TRY which have gained considerably since the announcement

TRY Curncy Turkish Lira Spot 2015 02 18 10 49 58

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