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WILL IT BE BAD IF GREECE EXITS THE EUROZONE?

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WILL IT BE BAD IF GREECE EXITS THE EUROZONE?

May 14 2015, 09.59am GMT

STOCK.com

Investors are worrying unnecessarily about the possibility of Greece defaulting on its debt repayment and exiting the eurozone.

If the exiting of Greece from the euro (EURUSD, +0.5901%) which has been dubbed ‘Grexit’, was really a cause for concern, then why did the recent U.K. elections not cause wide-spread panic? After all, the resounding victory by the Tory Party coupled with their negative stance on the European Union, has led some to believe that the U.K. could exit the European Union as early as next year. This has even been dubbed the ‘Brexit’. That said, the U.K. economy is much bigger than the Greek economy; in fact the U.K. economy makes up 16% of the overall GDP of all the European Union member countries compared to Greece’s 1.3 percent GDP contribution.

Given the above, there are two schools of thought. Either investors are denying the investment significance of Brexit, or they are over stating the Grexit significance.

However, according to analyst Mark Hulbert and his experience in analyzing stock market history, the latter is more likely. Sovereign debt crises like the once Greece has been battling in recent years are not uncommon and most often following past such a crisis, stock markets have increased.

Historical data clearly shows from previous similar debt crises like the 1994 Mexican peso devaluation, the 1997 Thai government debt crisis, the 1998 Russian ruble devaluation and the 2001 Argentinian debt crisis that the stock markets are reacting very similar to the Greek crisis now.

To further explain the surprising reaction to bad news such as Greece exiting the eurozone is the fact that governments usually step in when the crisis occurs and introduces huge fiscal or monetary stimulus, or both, which is almost the universal response to such crisis from government. Ultimately, this stimulus works its way through to the stock market which serves as a strong buffer against declining prices.

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