Greece leaving the Eurozone (an event termed a Grexit) could be just the very start of the currency bloc’s worries, with other nations such as Italy, France, Finland and Britain all questioning their ties with the currency bloc and the European Union.
— MacroPolis (@MacroPolis_gr) May 28, 2015
Euro to Pound Sterling (EUR/GBP) Exchange Rate Sinks as Investors Pre-empt Grexit Possibility
The prospect of a political change, such as Greece leaving the Eurozone, can have a major impact on the nation’s respective currency. As a result of this situation, the Euro to Pound Sterling (EUR/GBP) exchange rate has been subjected to serious depreciation as markets shy away from uncertainty. If Greece were to leave the Eurozone, the EUR/GBP exchange rate is forecast to sink significantly.
Friday’s IMF Payment and Greek Deadline Looms – Will an Agreement be Made this Week?
This week could be the final deadline for Greece with a looming €300M International Monetary Fund (IMF) payment due on Friday and the nation forecast to run out of funds within the next week or so. So is the situation finally coming to a head? Well… maybe not.
There have been rumours that Greece may consolidate all of its June IMF repayments to make one single €1.6B payoff at the end of the month, buying the nation more time to deal with creditors and meaning the importance of this Friday is lessened.
Greece’s Bailout Ends in June, €1.6B in IMF Repayments Due – Syriza under Pressure
That being said, talks can’t feasibly go on beyond the end of June with Greece’s current bailout programme due to end then. However, the Greek government is also due to pay pensions and salaries at the end of June which total somewhere in the region of €1.7B. So the pressure’s really on Greece and the Syriza government to make a deal soon after five months of floundering negotiations. It’s worth noting at this point, that there’s no other developed economy that’s ever missed an IMF repayment and in that respect, the IMF aren’t to be trifled with.
Greek PM Alexis Tsipras Hits Out at Creditors, Euro to Pound Sterling (EUR/GBP) Exchange Rate Sinks on Uncertainty
Not surprisingly, Greek bank deposits are at a decade low and cash withdrawals have been increasing. Monday saw Greek Prime Minister Alexis Tsipras lash out at creditors, a surprising move considering the usual optimism (whether we agree with it or not), that usually comes out of the Greek government. Furthermore, Greek PM Tsipras stated he wouldn’t be pushed any further by creditors and their ‘absurd demands’ and all but threatened to instigate a political and strategic crisis if it continued.
Tsipras commented on the reason a Greek deal hadn’t yet been made, saying: ‘It is due to the insistence of certain institutional actors on submitting absurd proposals and displaying a total indifference to the recent democratic choice of the Greek people, despite the public admission of the three Institutions that necessary flexibility will be provided in order to respect the popular verdict.’
‘This means the complete abolition of democracy in Europe, the end of every pretext of democracy in Europe, the end of every pretext of democracy, and the beginning of disintegration and of an unacceptable division of United Europe.’
Tuesday has seen increased speculation that there could be a snap election if Greece isn’t given the ‘honourable compromise’ that it’s craving. Goldman Sachs threw in its two cents on Monday, saying that it believed a referendum or new election may be needed for negotiations to reach a political decision.
Greek labour minister Panos Skourletis suggested that if the honourable compromise isn’t reached, ‘then we’ll have elections. When you are elected you are not given a carte blanche. If a deal is achieved that is not deemed honourable and promoting compromise, the people will have to be asked before we sign it.’
Tsipras’s take on Monday’s meeting in Berlin is that EU’s political leaders came together to examine proposal made by Greek gov’t #Greece
— Nick Malkoutzis (@NickMalkoutzis) June 2, 2015
@tsipras_eu says not waiting for proposal from creditors, Greece sent own ‘comprehensive plan’ ystdy. Seeks decision by EU political leaders
— NikiKitsantonis (@NikiKitsantonis) June 2, 2015
EUR/GBP Forecast to Fluctuate as Friday’s IMF Deadline Approaches, Will Greece Default?
So what can we expect? The Euro to Pound Sterling (EUR/GBP) exchange rate is likely to have some major fluctuations in the week ahead and if a ‘Grexit’ looks like a real threat, the Euro will sink against other majors.
More to the point, what will happen if Greece actually leaves the Eurozone?
If a Grexit were to occur, the Eurozone’s existence would be cast in doubt; will other nations follow in Greece’s footsteps? It’s highly likely a domino effect could occur, with nations such as Finland and Spain seeing a rise in Euro-skeptic parties in elections. There’s definitely an anti-austerity movement happening within the currency bloc and the Eurozone financial heads have no choice but to recognise it.
Grexit could Lead to Other Nation’s Leaving the Eurozone as Anti-Austerity Movement Sweeps Eurozone
This is one of the main problems, if Greece were to leave and flourish in its escape from austerity, other nations are likely to question their own membership and follow suit.
Spanish party Podemos is a popular anti-austerity group that’s seeing an increase in followers. France ‘s Front National Party leader Marine Le Pen welcomed the victory of Syriza in January and hailed the ‘monstrous democratic slap’ the Greek nation had given the currency bloc.
Moreover, Italian Prime Minister Matteo Renzi stated that the Syriza victory was giving a ‘message of hope not just fear’. It’s worth noting that in 2013 Italy’s anti- austerity Five Star Movement came very close to winning.
Although not part of the Eurozone, Britain is now to hold its own referendum to determine whether it remains within the European Union or not. As Britain approaches the referendum promised by the re-elected Conservative government to be held by 2017, speculation regarding a Brexit is likely to heat up and put some major pressure on the Pound Sterling to Euro (GBP/EUR) exchange rate. The outcome of this could be another devastating event for the EU and cause other nations to question the pros and cons of remaining within the union.
UPDATE: Wednesday saw Greece warn that without a deal, there would be no IMF repayment on Friday.
Greek government spokesperson Nikos Filis commented: ‘If there is no prospect of a deal by Friday or Monday, I dont’ know by when exactly, we will not pay.’
— Eleni Varvitsiotis (@Elbarbie) June 3, 2015
Wednesday saw Greek Prime Minister Alexis Tsipras fly to Brussels to have talks with European Commission President Jean-Claude Juncker which are expected to discuss a potential bailout deal.
— Yannis Koutsomitis (@YanniKouts) June 3, 2015
* German Fin Min Schaeuble says first impression of Greek list of reforms confirms view that talks won’t be over soon – RTRS
— Fabrizio Goria (@FGoria) June 3, 2015
Greek govt source – Tsipras’ Brussels delegation still has not seen a document from lenders
— Paul Mason (@paulmasonnews) June 3, 2015
UPDATE: Thursday’s European trading began with Greek Prime Minister Alexis Tsipras rejecting proposals sent by creditors.
— Ipek Ozkardeskaya (@IpekOzkardeskay) June 4, 2015
— Alexis Tsipras (@tsipras_eu) June 4, 2015
On Wednesday, the Euro to Pound Sterling (EUR/GBP) exchange rate was trading at 0.7339 while the Pound Sterling to Euro (GBP/EUR) exchange rate was trending in the region of 1.3628.