A drama has played out in Europe since the end of the last decade, as the nation that was the birthplace for democracy has struggled to manage its debt along with the fallout from a weakened local and global economy.
The crisis has raised speculation about the possibility of a "Grexit" — Greece's potential exit from the eurozone monetary union—and its consequential abandonment of the euro as its currency to return to the traditional national currency, the drachma. The country qualified for entrance into the eurozone in 2000 and was admitted as the 12th of the 19 current member nations in 2001.
Since then, however, Greece has amassed more than EUR320 billion in debt, equivalent to over 175% of the country's gross domestic product. The enormous debt has limited credit to the nation and caused negative repercussions. The unemployment rate has reached 25%, and some people have resorted to barter amid a lack of cash in the economy. If Greece eventually leaves the currency and the eurozone, it would be a first for any member of the regional monetary union.
Doomed From The Start?
With the move to the euro, Greece's costs of labour and production rose, hurting exports and weakening the country's trade balance. But because it was tied to the euro, Greece was unable to allow a currency depreciation in order to make its exports more competitive against competing imports. The solution was to reduce salaries and lay off workers at local companies. At the same time, the entrance in the eurozone gave the country access to borrowing large sums of funding for projects, such as infrastructure projects for the 2004 Athens Olympics, stimulating the accumulation of debt.
The situation for the Greek economy was aggravated in 2007-2009 following the global financial crisis. Credit availability dried up and lending costs increased, limiting financing for the country's economic activity. By 2010, the worsening conditions caused credit ratings agencies to lower the credit ratings on Greek debt to junk status, amid fears that the country could default on payment of its debt.
In May 2010, a group formed by the European Commission, the European Central Bank and the IMF, which came to be nicknamed "The Troika," negotiated an initial debt bailout for Greece of EUR110 billion in exchange for Greece's commitment to a series of measures including privatisations and structural reforms. But worsening economic conditions and delays on the part of the government prompted the need for a second bailout package, which was approved in 2012.
While the Greek economy saw some improvements after the second bailout accord, by 2014 strong discontent among the population regarding the lagging economy forced a change in the political leadership of the country. This brought the Coalition for the Radical Left party, known as Syriza, to control of the country's parliament. The government, led by prime minister Alexis Tsipras, called for a referendum on the terms of the second debt accord. Following the government's lead, the population rejected the terms of the agreement, reviving uncertainties over the future of the country's economy.
After the referendum, in July 2015, European and Greek authorities reached a third accord that would offer up to EUR86 billion in bailout funding over three years in exchange for Greece's effort to streamline pensions, increase tax revenues and liberalise the labour market. In September 2015, Tsipras' coalition was re-elected with 35% of the vote.
The latest debt accord and the survival of the government has distanced the likelihood that Greece will pursue a "Grexit" and leave the eurozone. However, some international economic authorities note that in the wake of its turbulent history of debt negotiations, that path lingers as a possibility for the country in periods ahead. That's particularly relevant if political and economic conditions do not collude to favour the country's continued participation in the euro monetary union.
Impact On The Euro If Greece Leaves
If it is eventually forced to leave the euro area due to the inability to sustain its debt, analysts note the exit of Greece may cause at least momentary shock and volatility in global markets. Greece would likely return to its former national currency, the drachma. It is unclear whether the country would default on a small or large portion of its debt, or if it would try to force a renegotiation on creditors, known as a "haircut."
The immediate impact of the move on the Greek economy could bring more severe consequences than the country has faced already. This could cause elevated local inflation, sharp currency depreciation and efforts by the government to impose currency controls to stem the outflows of capital from the country.((Retrieved [20 October 2015] http://www.ibtimes.com/greek-debt-crisis-what-happens-if-greece-leaves-eurozone-1997217))
Opportunities In Currency Market
If there are opportunities in a "Grexit," they could potentially be in trading the euro, and possible secondary impacts in other markets and currencies that trade heavily with the eurozone, including many emerging market currencies.
Evidence for the potential of a euro foreign exchange play has occurred in the past. Recent episodes when Greek debt bailout negotiations with EU partners broke down and when Greek voters rejected austerity plans in a referendum forced momentary selloffs of the euro, followed by a recovery. Many analysts believe the euro could follow a similar trend if Greece eventually left the eurozone, taking a momentary dip and recovering. The move could also have later impacts if investors then turned their eyes to other possibly vulnerable members of the eurozone. Those include nations such as Spain and Italy, both of which have also recently struggled with heavy debt loads.
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Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…