What Would a ?€˜Grexit?€™ Really Mean for the Markets?

Wednesday, 16 May 2012 9:02

Considering that Kim Kardashian elected to end her highly publicized (and ridiculously expensive) marriage after only 72 days and that Carmen Electra and Dennis Rodman's blessed union lasted under 300 hours, it shouldn't be entirely surprising that the previously idyllic European Union is now being called into question, with strong rumblings of a Greek exit from the union (already dubbed a ‘Grexit' by media outlets worldwide). The EU is only around 12 years old, significantly longer than most celebrity marriages, but still in its infancy as far as political unions are concerned. Although nothing has been confirmed yet, analysts can't help but wonder what a Grexit would mean, both for European countries and for global markets. The true ramifications of such a divorce may not really be known until a Grexit is confirmed, but there are some certainties that we can expect in advance of such an event.

How a Grexit Would Effect Greece

One of the first things that Greece would be required to do if the country withdraws from the EU is to create a new currency with which it can pay public expenses, public sector salaries and social security obligations. The problems with this requirement are multiple, including the fact that such a currency will undoubtedly be worth a fraction of the value of the Euro, the nation's current currency. According to the IMF, a new Greek currency could be valued at up to 20% less than the Euro's face value.

This is, of course, to say nothing of the logistical nightmare of having to print and distribute a new currency and to create a new set of laws governing how the new money would work. By some estimates, printing new money takes around 4 months, which poses all sorts of other conundrums that analysts are petrified to consider. It also doesn't speak of the fact that a new currency would wreak havoc on business growth and loan procurement for new businesses, which would stifle the already ravaged economy in devastating ways. Likewise, there would be a need to reissue all of the country's mortgages and loans and to prevent Greek citizens from attempting to withdraw all of their funds in Euros before a new, devalued Greek currency is issued. Looking at these issues, it seems impossible or ridiculous to even consider a Grexit"¦but unfortunately, such an event may be a requirement rather than a choice if the country cannot commit to the austerity demands imposed by the other member nations.

A Shakeup for the Whole EU

A Greek exit from the EMU would also have dramatic effects on Greek's lenders, all of whom would be holding debt that is essentially worthless. For this reason alone, many EU leaders are fighting to keep Greece in the union, despite the difficulties. Jean-Claude Juncker, the prime minister of Luxembourg and the current president of the EU's finance ministers mentioned this week that "?...nobody was mentioning an exit of Greece from the euro area. I am strongly against. We are 17 member-states being co-owners of our common currency. I don't envisage, not even for one second, Greece leaving the euro area. This is nonsense, this is propaganda. We have to respect Greek democracy." Still, Jose Manuel Barroso, the president of the European Commission, had a different comment, saying that "?If a member of a club does not respect the rules, its better that it leaves the club"”and this is true for any organization or institution or any project."

Unless Greek President Karolos Papaoulias can build a government (which looks unlikely at this moment) before the scheduled bailout payment next month, it seems that the possibility of a Grexit remains within the scope of reality. In other words, we can expect to see continued selloffs and decreased confidence levels before we can identify the light at the end of the tunnel.

The DailyForex.com team is comprised of analysts and researchers from around the world who watch the market throughout the day to provide you with unique perspectives and helpful analysis that can help improve your Forex trading.

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