Reports of the possibilities of a Greek default, accompanied by all the speculative views ranging from Greece leaving the eurozone to a complete exit of Greece from the EU, have caused havoc with the markets for a number of years.
The past month has seen the markets and currencies see-saw with changing news and predictions. The prime victim of all this has been the much maligned euro with the EURUSD having moved from a January high of more than $1.20 to the euro to a low of $1.05 to the euro in March. The current rate is at $1.11 to the euro amid speculation of a Greek default.
The news that Greece has in fact defaulted on its IMF loan repayment, that the EU finance ministers have refused to extend the bailout deadline while insisting that Greece must accept the austerity measures demanded by the EU, has ended one phase of the speculation.
The next phase, during which the world awaits the referendum result in Greece, will only last a few days until the 5 July referendum result is announced.
Comparing the bailouts that took place in respect of Ireland, Spain, Portugal and Italy where the EU structured bailout packages for the single currencies, teetering banks in those countries to the Greek situation is difficult. The other bailout recipients do appear to have made maximum use of the bailout funds in economic restructuring which has resulted in a return to an increased degree of fiscal stability.
The question must arise as to why this has not happened with Greece and the resultant crisis that is being faced by the eurozone and by extension by the euro itself?
The comparison must start with the size of the crisis faced by the different EU countries as a result of the 2009 Great Recession. The Greek public debt held abroad, which was at over 80% of the GDP compared to the Irish figure of around 52%, Spain at 28% and Portugal at 55%, gives a good indication of the potential ability of the recipient countries to repay the bailout loans. The value thus of the bailout to Greece was far in excess of that to the other countries, in itself a cause for concern as the repayments had to be so much larger.
Growth projections for the Greek GDP at the time of the bailout were hopelessly over stated and the reality is that the GDP in Greece has contracted by 22.67% over the past five years according to figures from the Global Property Guide.
The decline in GDP, accompanied by a determined refusal on the part of the Greek man in the street to accept the austerity proposals of the eurozone and the IMF, has had an inevitable result. You end with a situation of declining income from a falling GDP while the expenditure remains the same; a recipe for disaster.
The future of the euro, not only in terms of its value, but its very existence, will, in very simple terms, depend to a large degree on the result of the Greek referendum. A final quote from Yasunobu Katsuki, senior analyst at Mizuho Securities, who commented, “Financial markets will say ‘it's all Greek to me’. Markets will reset their trend and start the week ( this week) with risk aversion”.
MT4 Chart: EUR/USD