Pondering a Greek Tragedy

FX Strategy Articles > Fundamental articles

With FX markets along with global stock and bond markets showing no let up post the 24 hour “everything will be ok” Eurozone deal, this Friday we take a look at how things may play out if (or is it when??) Greece defaults and what it means for the EUR.

John Hempton, a well know hedge fund manager and blogger, pondered the outcomes of a Greek Sovereign Default recently and which ever way you diced it as Hempton said a Greek default will “stick most of the losses on Germany and France”.

Hempton suggests the default may take 1 of 2 forms. First option: Greece de-pegs and issues a new Drachma. This means that whatever debts Greece might have in, say EUR, it will repay the debt in new Drachmas. This will result in massive losses for banks as their EUR holdings will literally over night become devalued new Drachmas!

This style of default has a precedent – Argentina. (It worked quite well actually!) However what happens next is more concerning. As Hempton outlines – it will work so well for Greece that all the other PIIGS will follow suit. Think Bank Run of epic proportions as all remaining PIIGS countries try to get their money into safe-haven countries like Germany – the PIIGS citizens don’t want to end up owning a new peso or new lire!

Needless to say a dramatic bank run under this scenario would bring down a tonne of Italian and Spanish banks.

The second form of default suggested by Hempton is where Greece defaults but keeps the EUR. This option is better for Germany but not for Greece as their banks would now be insolvent. Perhaps this option is more likely though given Germany’s power in all this, however it would mean years of dysfunction for Greece – which they are unlikely to be prepared to take.

George Soros thinks he has the solution and we’ll take a look at that next Friday.

In the mean time, we hope this has brought home just how dire the situation is in Greece and the abyss we are looking inside of – so determine your FX Strategy with great care and risk aversion.

Published on 20th of December 2011
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