Is Greece that important?

February 22, 2015 12:25 AM

Will Greece leave the European Union or perhaps just the single currency? A more important question may be; would it matter?

The last few weeks the financial news has been preoccupied with dire warnings and updates on the Greek situation. Will they successfully renegotiate their bailout from the European Central Banks (ECB)? Will the ECB accept new terms?  

Since Alexis Tsipras was sworn in as Greece’s new Prime Minister las month and indicated a pivot from the austerity measures placed on it as a condition from the ECB there has been talk of a “Grexit.” 

The Greek economy has been under stress due to overwhelming levels of doubt since the onset of the credit crisis (and much earlier probably). It has gone through the painful process of “austerity” thrust upon in by the ECB but is it really that big of a global factor?

As we have noted in the past, business wire services tend to jump on the hot story of the day and attribute every market move to that story. A few months ago it was the situation in Russia and Ukraine. Cease fire talks were on or off and market moves, up or down, were attributed to the current headline. It didn’t matter what the headline was as much as what the market did.

Recently it is Greece.

It doesn’t matter if it is U.S. equities, European equities, currencies, the dollar, the yen, energies, gold or Japanese Azuki beans. Whatever happened in that particular market for that particular day, a wire service story attempted to tie that move in with the negotiations between Greece and the ECB—and the comments of its most powerful member, German Chancellor Angela Merkel.

When the sovereign debt solvency problems of the PIIGS—Portugal, Ireland, Italy, Greece and Spain, first came to light several years ago there was some speculation of a break-up of the Eurozone. At that point it was pretty clear that Greece was the most vulnerable of those countries.

When the initial Greek bailout was approved the question was “would it work.”

At the time Jamie Thorsen, executive managing director for BMO Capital Markets, told Futures “Normally when you have a situation like this, you restructure your debt and you devalue your currency. Devaluing jacks up your competitiveness, [which] means you are able to earn your way out. Unfortunately they can’t devalue so this is essentially kicking the can down the road.”

It’s success hinged on economic growth in Greece and the Eurozone, which has not happened. Thorsen noted at the time that Greece would likely have to leave the Eurozone (single currency) so it could be able to devalue its own currency. “The question would be could you remain in the EU but not in the Eurozone?” she asked. “That is not clear.”

While Greece is in the midst of an ongoing crisis, its overall size does not justify the swings in various markets that are being attributed to it. Perhaps some see it as a proxy on the entire single currency concept but should it? Particularly now when other of the so-called PIIGS have become more secure.

Probably not.

We have noted for several years how the current recovery was somewhat of an illusion driven by central bank policy. More recently the economic news, at least in the United States, has improved to the point where the markets need to stand on their own.

If it is in Greece’s best interest to leave the Eurozone it should. After initial spams regarding the idea of tapering, U.S. markets recovered and understood is was not a tightening and really not a big deal.

The same goes for Greece. It would be best to make a decision and move on. Greece may be blamed for recent turbulence in certain markets but in the end, it is not that important. 




About the Author

Editor-in-Chief of Modern Trader, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange.