The Euro (EUR) exchange rate faces a potential crisis as the year progresses, with no Greek deal in sight and the nation dancing on the very precipice a financial crash, some prominent questions remain: will the Greek government agree a deal in time, default on payments, or have a full-on ‘Grexit’ and adopt the Drachma?
Euro (EUR) Exchange Rate Forecast to Drop if ‘Grexit’ Occurs
There’s heavy speculation on the topic and the jury’s still out on the overall conclusion, but here’s some food for thought; would Greece be better off with its hefty austerity package and remaining within the Eurozone, or would it be better leaving the Euro behind?
A recent poll indicated that 66.5% of Greek citizens prefer the Euro to the long-lost Greek Drachma, and only 27% wanted to return to using the former currency. Furthermore, the poll questioned citizens on their views of the new Greek government, Syriza, and how they believed they’d handled matters. On the subject of ‘crucial issues’ the Syriza government scored only 3.8 out of ten on the prospect of reducing high levels of unemployment, while scoring 3.3 on decreasing high costs on basic necessities.
— Efthimia Efthimiou (@EfiEfthimiou) May 13, 2015
Grexit Forecast to Create Domino Effect and Long-Term Euro (EUR) Exchange Rate Weakness
One of the main problems for the Eurozone and the Euro (EUR) exchange rate is the possibility that a domino effect could occur if Greece says no to austerity and goes it alone. There are other nations within the Eurozone that haven’t performed particularly well since joining the currency bloc, like Finland for example. In the recent Finnish general election, Eurosceptic party the Finns jumped into second place with 38 seats, just slightly behind the winning party with 49 seats.
— Olivier Bailly (@OlivierBaillyEU) May 13, 2015
So why were the Finns so popular? Remember Nokia? The phone giant that was once at the height of technology that just… fizzled out? Well it may not have disappeared, but Nokia’s demise is just one thing Finland gained from being in the Eurozone. Additionally, Finland’s lumber industry recorded some hefty losses and the nation appears to be a shadow of its former self.
This brings us to the Eurozone domino effect, if Greece leaves and prospers, other nations may follow suit. The biggest risk to Greece at the moment is that the nation will default on one of its many massive debt repayments, causing an accidental Greek exit – termed a ‘Graccident’.
Greece’s Multi-Billion Euro (EUR) Debt Piles Pressure on Greek Negotiation Scenarios
So what are Greece’s debt levels? Greece currently owes a massive €320 to creditors; €240 billion of the overall total comes from the bailout it received, while it owes another €56 billion to Germany. Greece’s unemployment rate is residing at over 27% and prolonged negotiations have only damaged the economy further.
— Open Europe (@OpenEurope) May 13, 2015
Therefore, there are several scenarios worth considering:
1) Greece makes a deal with its creditors.
If the nation were to agree on a set of reforms, Greece would have access to bailout funds that it’s been deprived of amid ongoing negotiations. Greece could pay pensions and wages and as it stands, the Greek government currently needs to muster up one billion Euros (EUR) for those payments at the end of this month alone. Reports of government employees, such as doctors and teachers, suffering serious delays in payment are rife and let’s not forget the government’s failed attempt to put all pensioners’ funds in one pot to prolong liquidity.
— The Greek Analyst (@GreekAnalyst) May 11, 2015
This scenario would see a new deal in place for when the current aid programme expires in June and Greece would continue with a slightly better austerity package. It’s unlikely with so much vocal opposition coming from Eurogroup heads that Greece would be able to get a massive improvement on its current deal.
2) Greece defaults on payments but a ‘Grexit’ or ‘Graccident’ don’t occur.
It’s very possible that talks will continue to be lethargic and with Greece destined to run out of money before we reach June, there’s the very real threat that no deal will be agreed upon by that time. Greece would therefore default on its debt repayments with a lack of funds available, as well as being unable to pay wages and pensions (which is sure to sew discontent among citizens). Additionally, the Euro (EUR) exchange rate would slip dramatically lower as uncertainty swept the market.
3) Greece defaults and leaves the Eurozone and perhaps the Euro (EUR) behind.
If progress isn’t made (and it’s worth noting that no major breakthroughs have been made in the past four months), it could get to the point where Greece fails to make its debt repayments as talks break down and liquidity assistance is cut off. The European Central Bank (ECB) would halt its emergency aid (known as ELA) and that brings us to the Drachma.
UBS economists forecast: ‘The liquidity situation of the banking sector would nevertheless worsen so dramatically that, in order to avoid a collapse of the banking system, the government would have no choice but to introduce its own currency.’ –Hello Drachma?
So, are we soon going to see the Drachma exchange rate popping up on our forex charts? If Greece were to leave the Eurozone, the Euro (EUR) exchange rate would crash significantly. Although, there is speculation that Greece could leave the Eurozone and still keep the Euro (EUR) currency, which would be an interesting development for the EUR exchange rate and may keep it more buoyant.
Greek Referendum Forecast to Crush Euro (EUR) Exchange Rate on Investor Uncertainty
However, there’s one more point that could throw a cat amongst the pigeons amid negotiations; will Greece hold a referendum on whether to accept the austerity deal? The Syriza government has suggested it wants its citizens to have the option, but have they got enough time and what will the Greek people say? Despite only a small percentage of citizens wanting to use the Drachma again, if the people want a ‘Grexit’, that’s what they’re likely to get. If a referendum does take place, the Euro (EUR) exchange rate is likely to drop as citizens decide the fate of Greece, the Euro (EUR) and the Drachma.
At present, the Euro to Pound Sterling (EUR/GBP) exchange rate is trading at 0.7222; the Pound Sterling to Euro (GBP/EUR) exchange rate is trending in the region of 1.3850.