A Greek exit would have huge implications for the Eurozone

A Greek exit would have huge implications for the EurozoneOver the past week €700 million has been withdrawn from Greek banks as many investors are looking to transfer funds out of Greece

Political leaders in Greece have failed to form a coalition government signalling fresh elections next month. Just over a week ago an inconclusive general election saw voters reject the established political parties in favour of anti-austerity movements on both sides of the political spectrum. Exit polls suggest that the leftwing SYRIZA party led by Alexis Tsipras, who were the surprise runners-up on 6 May, will claim victory comprehensively in the next set of elections.

Anti-austerity Tsipras has vowed to renege on Greece’s austerity agreement: “The popular verdict clearly renders the bailout deal null.” His aggressive stance on the matter has caused many economic analysts to accept that Greece’s Eurozone membership is riding on its last legs.

The bottom line is that a victory for Tsipras greatly increases the chance of a Greek exit.

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And a Greek exit has huge implications for the Eurozone.

The tenuous situation in Greece has already caused chaos within financial markets; stocks have plummeted, bank deposits have fallen sharply, and the Euro has declined to its lowest level in three-and-a-half years.

But the economic ramifications of a Greek exit are far more serious.

If Greece defaults on its debt obligations and is subsequently ejected from the currency bloc then it will face numerous challenges to keep the country afloat. Greek currency will devalue, inflation will soar, banks will collapse, businesses will become bankrupt, and the economy will contract sharply.

In terms of currency the most likely scenario is that all Greek Euros (distinguishable by the serial number) will be converted into new Drachmas with an effective exchange rate of 1:1 against the Euro. Whilst the Central Bank prints new banknotes in preparation for the changeover, Greek Euro banknotes will be stamped and these will be used as temporary currency, leaving unstamped foreign Euro notes no longer accepted as legal tender. In a few months time when the new Drachmas are released, all old banknotes will be withdrawn and demonetized.

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The initial 1:1 exchange rate is not expected to hold up in the currency exchange market, and the new Drachma is widely predicted to experience rapid devaluation as investors price it in line with the dreadful Greek economy. This scenario could potentially cause huge losses for anybody with investments or assets in Greece. The Greek government will most likely employ capital controls to prevent large masses of money from leaving the country as people look to gain an economic advantage.

Over the past week €700 million has been withdrawn from Greek banks as many investors are looking to transfer funds out of Greece to avoid the risk of currency devaluation on their asset values if a Greek exit does materialise.

Related posts:

  1. The Euro was well bid yesterday against the Pound and the US Dollar in the build up to the Greek debt deal
  2. Pound Sterling to Euro Foreign Currency Exchange Rate Forecast – Sterling slips as 2nd Greek bailout agreed
  3. Last night Greek rioters burnt down an underground cinema in Athens
  4. Eurozone Gross Domestic Product sank to -0.3% in the fourth quarter
  5. Pound to Euro, US Dollar exchange rate: The Pound remained largely unchanged against the Euro

Article source: http://feedproxy.google.com/~r/ForeignExchangeOutlook/~3/jLQdid_vT24/

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