By: Dr. Mike Campbell
Jitters have returned to the markets and foreign exchanges over the possibility that Greece will default on its debts. Having joined the Euro, Greece has no mechanism whereby it can devalue its currency – since it is shared with 16 other nations. It is highly unlikely that Greece would leave the Euro of its own volition or be asked to leave by its partners – the chaos and loss of faith in the Euro would be catastrophic.
If Greece were to default on its debts, it would mean that creditors got less money back on their investments rather than the value of the investments fell to nothing as can be the case when a business goes bust.
The speculation has led to a decline of the Euro against other major currencies. It is currently trading one cent lower against the US Dollar, having slipped by nearly three cents since Friday. It currently stands at 1.4061 to the Dollar.
Possible Outcomes
There had been discussion at the EU in which “re-profiling” of the Greek debt was being considered as a possible solution, but clearly there is no agreement on the wisdom of such a move with both the ECB and France opposing the idea. The very fact that modifications were being considered was enough to trigger market jitters.
For its part, Greece has again assured creditors that it will meet its obligations. The confusion has sent the yield on Greek 10-year bonds to a new high of 16.7%. Ratings agency Fitch’s has reduced Greece’s rating to B+ which is four notches below “investment” status and eight notches above “default”. In the past, downturns of the Euro caused by the sovereign debt crisis have reversed themselves on a time base of weeks, so there could be some value in going long on the Euro once nerves have calmed down, but at the moment, short-sellers will be feeling happy.