If Greece leaves the EURO, what happens next?

The questioning, fears and speculations as to whether Greece will leave the Eurozone are spreading widely, influencing world markets and weakening the Euro. For instance, last few weeks the US Dollar has gained further ground and the GBP has rallied to 1.26’s against the Euro, enabling investors outside the EU to take advantage of rates such as GBP/EUR and USD/EUR, which have been traded at record highs. The USD itself has the potential to get stronger due to the Eurozone crisis as the concerns over the Greek exit sapped investor demand for higher yielding assets.

As evidence of this, RationalFX, foreign exchange and money transfer specialists, have seen an increase in the number of Euro buyers and the volume that they are buying. Even people looking to sell are committing now, as they fear the Euro will weaken further. The amount of traffic that they have received across their multilingual websites has come significantly from European countries such as France, Spain and Italy. Speaking in numbers, the growth of other trades in GBP/EUR for example was about 70% last month. Due to the announced Greek elections in June and the probability of choosing an anti-bailout government, together with news about panicked Greeks pulling out their Euros from banks, RationalFX expects the Euro trades to continue to grow. 

The situation with Greece is not bright, as the world is well aware. Even if Athens negotiated debt write-off, the ´health´ of its economy would not been helped. To get back the lost competiveness Greece obviously has to follow only two painful paths: either to keep the Euro and lower salaries, benefits and prices in the country significantly, or to leave the Eurozone and return to the Drachma.

In terms of the immediate exit of Greece, the implications would be extremely detrimental for businesses, however the severity of the situation is hard to grasp at this point.If Greece reverts to the Drachma, banks across the world would have to react instantly in order to satisfy payment in and out of Greece. International traders in Greece would see the costs of goods and services rise dramatically, causing extreme fluctuations in profit and loss. For traders outside of Greece the cost implications may be of benefit as the Drachma would be weaker than the Euro by a wide margin, however, the confidence in the country could deter importers from Greece to source elsewhere or even use an alternative stable currency.

The potential reintroduction of the Drachma would likely be regulated by Greek authorities. Among the main questions will be the confidence in the Drachma. It could well be that even local businesses continue pricing themselves in Euros or even US Dollars, as the Drachma is poised to continuous devaluation. Regarding the ripple effects on world market the exist of Greece could well encourage other peripheries to follow suit and opt out of the Euro. It will certainly give ammunition to weaker European economies to soften austerity cuts, which will make it extremely hard for the ECB and the IMF to continue funding banks and ultimately governments. The cost of borrowing could sky rocket for weak economies causing another credit crisis and a possible drought of funding.

The possibility of a Greek exit from the Eurozone is implicating questions about the monetary system itself; it is apparent that the ´problematic´ states threw it at a crossroads and that it is ´tearing itself apart, without any obvious solution´. Although a Greek exit would not mean an immediate end of the Euro and could even trigger a stronger and more stable Euro, it could at the same time become a point when an avalanche is set off. If Spain and Italy followed, it could have a similar impact to Lehman Brothers´ 2008 collapse. Concerns in Spain are nowadays on domestic toxic mortgage securities and if the Eurozone starts to break up, the property market is likely to feel the impact causing less people to invest in Spanish property thus further bleeding of local banks. As Italy is the third largest debt market in the world, an exit of the country could be catastrophic and the amount of debt held by the sovereign could escalate to paralysis. Italy will have to consider hard if it chooses to exit the Euro, more so than any other nation in the Eurozone.

There is no easy solution or certainty in the Eurozone being saved and European governments will have to act more decisively in order to save the Euro. The monetary system of the old continent needs more than ‘avoiding recession for the first three months in 2012’ to increase any real consumer or investor confidence in the troubled economy.