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Is Euro Currency Worth Investing Amid Greek Crisis?

23 May 07:37 AM

On May 6^th Greece held parliamentary elections, which became crucial for the destiny of the eurozone. The thing is that there was a political split in the newly-formed Greek government, which suggested that there was little chance of forming a viable coalition. The former coalition of “New Democracy” and PASOK needed 2 more seats to win the parliamentary majority and to continue their austerity plan approved by the EU and international financial institutions.

The President of Greece is now trying to save the day by forming a “government of national salvation”. However, SYRIZA, the party that won the second place in the elections, stays adamant and is not going to compromise with the EU and those Greek politicians who bow to Brussels’ wishes.

What threats does the Greek political crisis present to the EU and the eurozone? Is it time to sell the Euro amid the political and economic instability in the country?

Greece as the major driver of the European instability.

According to Eugene Olkhovsky, Masterforex-V Academy’s leading expert in financial markets, in March 2012, Europeans breathed a sigh of relief after the Greek authorities managed to agree with the EU and private investors, thus eliminating the threat of a default.

Numerous experts instantly started screaming that the crisis was about to be over. Even Fitch Ratings raised Greece’s long-term credit rating in March from RD (selective default) up to В–, with a stable forecast. S&P improved the Greek rating on May 2^nd.

However, the rating agencies pointed out the possible risks connected with the parliamentary elections. They must have second sight…

How real is the possibility of Greece leaving the eurozone?

According to Masterforex-V Academy, this is not another bogeyman story created by mass media. The following factors confirm that:

The failure to create a coalition in the Greek parliament means that according to the constitution the new elections are to take place in 30 days. Therefore, even if the president announces about another round of parliamentary elections today or tomorrow, they will be held in late June.

According to the conditions of providing another tranche to Athens, the Greek authorities will have to consider extra budget spending cuts by €11B in June. For now, let’s put aside the political aspect of the issue. Technically, Greece just doesn’t have enough time do everything on time: to hold elections, to form a government and to cut the budget spending.

Therefore, if the conditions are not met, there will be no tranche for Greece. If there is no external financial aid, Greece will fail to service its public debts, which will lead to a default. Obviously, no major economic alliance needs a default economy. That is why the eurozone will try to get rid of Greece if it does default on its debt.

According to Sunday Times (UK), British banks have estimated the changes of Greece leaving the eurozone as 50/50 and are getting ready for it…

Are Europe and the rest of the world ready for the worst scenario?

If Greece does eventually leave the eurozone, it will cause a sea of problems:

· This will be a severe blow to the eurozone’s image.

· The membership conditions will toughen. At this point, there is no clear procedure of how to withdraw from the EU or the eurozone. At the same time, the current policies demand the EU states should sacrifice a certain share of their sovereignty (finances and taxation) in favor of Brussels.

· The eurozone is a trade union as well. Strong eurozone economies see peripheral ones as domestic outlets. If Greece leaves the eurozone, Germany and other major eurozone economies will lose one of such outlets. According to UBS, Greece accounts for 2% of the eurozone GDP.

· The USA seems to be not willing to offer financial aid, thus offering only advisory support. The eurozone counts on China. However, it is not clear whether Beijing will be willing to invest in the expanding financial alliance. Moreover, the Chinese authorities will probably toughen their conditions, including an expansion of the Chinese export to Europe.

· And finally, it is about the domino effect. If Greece leaves the eurozone, the EU authorities will start looking for another weak link of the PIIGS chain. The eurozone membership of the remaining PIIGS states (Portugal , Ireland, Spain and Italy) may be threatened.

According to the Institute of Global Finance (IGF), a Greek default will cause the lenders to lose up to €1 trillion. Yet that won’t be the end of the story. In order to protect the other PIIGS states from the Greek problems, the eurozone will need €730bn more within 5 years.

What will happen to the Euro currency?

Fitch Ratings warned that the sovereign ratings of most eurozone members will be downgraded if Greece leaves the European financial alliance. According to Masterforex-V Academy, Fitch will instantly downgrade the ratings of Ireland, Portugal , Spain , Italy, France, Belgium, Cyprus and Slovenia.

However, the eurozone won’t probably die if Greece does eventually default on its debt and leaves the eurozone. The cumulative debt of all the eurozone members is less than 85% of the eurozone GDP. The eurozone economy is growing faster than the US one. Germany, the eurozone’s strongest economy, is currently showing outstanding economic performance.

However, the common currency will probably feel the pressure of several negative factors if the worst happens:

Overall panic will cause stock markets to fall. The US bond yield will decline. Investors will start getting rid of the Euro and buying US bonds. Financial instability will result in costlier business. European producers will search for new outlets outside Europe.

As a result, the Euro currency will weaken against other major currencies.

EURUSD:

According to the DFWA Department of Masterforex-V Academy, the previous rally failed to form wave 3. Therefore, it is expected to be formed if there is another rally. A further decline of EURUSD is hardly probable. This week the price will probably be fluctuating within a price range while preparing for an attempt to reverse the downtrend.

Market Leader and Masterforex-V Academy would appreciate if you could participate in a survey. Please, visit the Academy’s forum for traders and investors and answer the following question:

What will happen to the eurozone if Greece leaves it?

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