May 17th, 2012

Markets are running scared at the possibility of a Greek exit from the eurozone. Greece’s indecisive election means the country now faces the conundrum that the majority of its population want to stay in the eurozone yet few are willing to weather the austerity measures to enable it to do so. The Far Left talks vaguely of renegotiating treaties with Germany, but there can be little doubt Greece’s future place in the eurozone looks precarious. The trouble is that any exit threatens to be an unholy mess. If Greek assets move to become denominated in drachma rather than euros, every holder of those assets faces a sudden write-down as the currency depreciates. This runs from Greek savers to the German government and the potential ramifications are significant and unwelcome – for example, further social unrest could follow as Greek investors realised they have seen a write-down on their pension pots. The write-downs may derail the German economy, which has been the engine of eurozone recovery, or threaten the stability of its banks. Then there is the much-discussed risk of contagion. If Greece contrives an exit from the eurozone, would government bond traders and hedge funds shift their attentions to other weaker nations within Europe – most obviously Portugal, Ireland, Italy and then possibly Spain? Will these other countries inevitably fall if Greece can find no way out of its current hole? There are also some logistical hurdles – for example, if companies are worried about contagion, could they reasonably keep money on deposit denominated in euros? Would shareholders accept it? If they did not, what impact would that have on European banks? Could all the hard-won stability from the European Central Bank’s LTRO be undone? However, does this really look as bad as the alternative, if, indeed, there is an alternative? Whatever the proclamations of Greek politicians, there is no resolution to their current dilemma. The remainder of the eurozone will not let Greece off the hook, capital markets will not lend to a non-eurozone backed Greece and the Greeks will not accept the austerity measures necessarily to appease eurozone policymakers. There may be worries surrounding a Greek exit but there appears to be little choice. There is one other scenario that appears to have been ignored by many of the commentators on the eurozone… perhaps it might just end with Greece. Perhaps, with Greece out of the eurozone, the remaining countries could find the resources to stabilise and improve. It does not make for good headlines, but it is worth remembering Greece’s debt situation is worse than that of any other eurozone country by a factor of almost 50%. Some commentators have been quietly predicting a significant bounce in markets on Greece’s departure. It should not be ruled out.   For Investment Advice, please call Mark or Clare at GMP Independent Financial Advisers LLP on 0207 288 6400  

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