Euro wedged between a rock and a hard place over Greece

February 11, 2015 11:27 AM

Despite the tense negotiations between Greece and it's Eurozone creditors some sort of solution is likely to be found rather than letting the country leave the euro and so far that outcome seems relatively well priced into the market.

As is the style with consensus politics some sort of muddled solution is likely to be found between Greece and the Eurozone. Indeed, forex traders have become used to the Eurozone clumsily ambling from one crisis to another. The stand-off with Greece, which wants to ease the austerity programme imposed on it by its creditors, is just the latest instalment of the EUR saga.

A resolution is likely to be temporarily supportive for the euro – the big danger for EUR longs is if talks break-down with Greece looking dangerously close to exiting the Eurozone.

In this show down, the Eurozone, despite being the creditor, holds the strongest hand. Greece needs to refinance some of its debt (though it runs a primary surplus). Its real Achilles heel is its banks. They're relying on the European Central Bank – one of Greece's creditors – for funding.

With capital outflows of 15 billion since early December, liquidity support from the European Central Bank for Greek banks has risen to 56 billion at the end of December from 44.9 billion at the end of November. 

If Greece were to leave the Eurozone, it would probably have to re-adopt the Drachma so it could provide liquidity to its banking system (the ECB would cease to do that). At the same time the value of Greek savings would be destroyed and very high interest rates and inflation would follow as the Drachma plunged in value. Also, simply walking away from its euro denominated debts, 80% held by Eurozone and IMF institutions, may not be that easy either.

EUR/USD – market poised for outcome of Greek negotiations

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About the Author

Justin Pugsley is the forex and gold markets analyst for New Zealand-based trading platform provider MahiFX. He is a keen student of markets, economics and history. Prior to working with MahiFX, Justin worked for a number of leading media organisations such as Thomson-Reuters and Dow Jones/Wall Street Journal.