Forex news, fundamental analysis. On Friday information that leaked through an RSS feed of the online version of a respectable German magazine, Spiegel, literally exploded the financial world: Greece is exiting the Eurozone! The foreign currency market reacted instantaneously: it took the euro only a few hours before close of the trades to fall more than 1 percent against the dollar. However, as reported by Deutsche Welle, finance ministers of EU countries rule out Greek withdrawal.
Aware of how significant the threat is, 'heavy artillery' entered the battle right off. Eurogroup Head, Jean-Claude Juncker, admitted that Luxembourg held a meeting of finance ministers of Germany, France, Greece and other countries also attended by the EU Commissioner for Economic and Financial Affairs, Olli Rehn, and ECB President, Jean-Claude Trichet. The meeting members discussed the situation in Greece, Portugal and Spain but the issue of Ellas' quitting the Eurozone was not raised even in the lobby. The Prime Minister of Luxembourg described rumors that Athens was giving up the Euro as 'a stupid idea': 'This is a step we will never take'.
A similar statement was made by Greek Prime Minister George Papandreou who said Spiegel's information was 'a provocation' that bordered on a crime and Greek Finance Minister George Papaconstantinou who described the country's exit from the Eurozone as a large-scale disaster.
Nevertheless, Spiegel journalists insist their information is reliable and leaked by very reliable sources.
Can Greece (followed by other weak EU players such as Portugal or Ireland) really exit the Eurozone? How will this affect the single currency? How will the euro's collapse affect the unity of the European Union? These were the issues discussed by experts of the Masterforex-V Trading Academy.
Greek problems
In 2002 Greece became EU's twelfth country to give up its national currency, drachma, in favor of the euro. Even though Athens did not undertake to meet tough standards of the European Central Bank, the country rolled down into the financial abysm slowly but surely:
• public spending was growing, and taxes were lagging behind. After amendments to tax laws Greeks started evading taxes even more actively;
• deficit of the 2010 state budget exceeded the limit allowed in the Eurozone by more than 3 times;
• based on more accurate Eurostat figures published in late April this year, the real deficit of the state budget was higher than claimed before - 10.5% against 9.6% of GDP. This is 5% less than in 2009 but this is in the context of Athens' promise to decrease its deficit to 8% last year;
• Greek public debt grew from 79.3% in 2009 to 85.1% in 2010;
• loans. To save the country from a default, Athens took out preferential borrowings from the EU and IMF totaling €110 bn.;
• Athens cannot cope with a growing budget deficit and public debt because of high consumption levels in the country that Greeks do not feel like parting with. A third of the Greek population does not support its government's measures to cut public spending (i.e. salaries, bonuses and pensions) which is enough for social unrest.
• an excessive quality of life was possible in Greece for many years because of loans. Now it should be decreased by at least 20%. Any country attains this through inflation but Greece, being a Eurozone member, has no central bank of its own. So, the only way out is to cut salaries, pensions, benefits.
Gravity of the situation is exacerbated by rumors that Athens has plans to request that the ECB and IMF restructure of its loans by extending the term and decreasing interest rates. The government and international regulators deny this, but experts believe otherwise: Greece will not reach out to capital markets next year as planned by Athens and international financial organizations which credited Ellas sons.
Will other EU members come to Athens' rescue?
Of course, yes. This is what heads of both the European Union and the ECB stated: 'We don't want the situation in the Eurozone to explode without any reason whatsoever', - said Jean-Claude Juncker. ECB President Jean-Claude Trichet described the option of giving up the Euro 'absurd'. Experts point out that there is simply no mechanism for exiting the Eurozone: 'The Greeks cannot simply wake up tomorrow and say: we are no longer in the Eurozone', - points out R. Leven, Chief Currency Analyst of Morgan Stanley in New York.
Many stakeholders are not interested in Greece's exit from the Eurozone:
• European banks are major creditors of Greece, Portugal , Spain - public and private issuers of these countries owe them $1.3 trillion. European banks cannot allow a write-off of any significant part of this debt;
• exit of the euro will immediately cause a galloping growth of inflation and a slump in the quality of life in the exiting country;
• when any member exits the Eurozone, the remaining members lose their markets.
However, opinions of many politicians and a large element of the Eurozone's and European Union's population are absolutely opposite:
• citizens of Great Britain and Denmark look down on the situation around Greece and are rubbing their hands with joy that they never entered the Eurozone;
• citizens of many Eurozone countries speak for a return of national currencies. For example, 49% of Dutch people would like to go back to their guilder, even more Germans are nostalgic about their mark;
• economies of problem-ridden countries (Greece, Portugal , Ireland) suffer from being in the Eurozone - their competitiveness has lost more than a third since 1999 as compared to Germany. Exit of the euro will devalue their national currencies but this will in turn create conditions for growing exports and higher competitiveness;
• Germany will benefit from a return to the mark. Germans get nothing from today's positive foreign trade balance. Once they return to the mark, consumer and public spending will grow and, as such, improve the quality of life in the country. A year ago, when the question of offering Athens billions in aid was high on the agenda, German Bild asked: 'Why are we paying for luxurious Greek pensions?'
What does Greece's exit from the Eurozone threaten?
European capitulation of Greece will have serious consequences for the Eurozone:
• Greece's exit will undermine trust in the euro. This is what the main rival of the European currency will benefit from - the US dollar;
• default of any Eurozone country will provoke a decline in demand for government bonds of other Eurozone members. it is cheaper to keep one country afloat than for everyone to forefeet an opportunity for refinancing.
• Greece's withdrawal might provoke similar action from other Eurozone members. Nobel Prize winner Nouriel Roubini believes that Greek exit is a problem for the euro and the EU, but Spain's withdrawal is a disaster;
• the split within the Eurozone will inevitably affect political stability of the European Union which took as many as 50 years to build. George Soros' words sound prophetic: 'We have two Europes: with and without debt. I do not rule out that the single currency will lead to a political conflict in the EU'.
Greek tragedy is in full swing. A few acts have already taken place. How many more acts of the Hellenic tragedy should we expect in the future? What is in for the euro rate?
Experts of the Faculty of Detailed Learning of the Masterforex-V Trading System point out: the euro's sharp fall late last week broke MF Sloping Channel as the first sign that bullish Weekly wave 1.2873-1.4939 has finished.
We expect a break of a powerful support in the area of 1.4150 to confirm the above. Unless this support level is broken, the long-term bullish long trend can continue through an original pattern of Elder/MF Hound of the Baskervilles.
The Editor's Office of Market Leader in conjunction with experts of the Masterforex-V Trading Academy holds a survey at the traders' forum: Will Greece exit the Eurozone?
• yes, within one-two years;
• yes, but Eurozone members will resist in to the last;
• no, this might ruin the Euro currency.
