The Greek Debt Issue and its Impact on Currency Exchange Rates

For some time now the economic issues faced by Greece have been headline news and with some staggeringly large payments due to be made by the debt laden country in the coming weeks, the issue appears to be coming to a head. The impact that this crisis has already had on the currency market has been dramatic, and with the future of Greece’s participation in the Euro hanging in the balance we expect the rates to remain volatile. Below is a brief outline of what impact the protracted negotiations between Greece, the IMF and the EU could have on Sterling exchange rates.

It is widely known that Greece currently has a mountain of debt, owing money to both the International Monetary Fund (IMF) and the European Central Bank (ECB) following the bailouts it received back in 2010 and 2012. They are also awaiting a further 7.2 billion Euros in bailout funds which are being held back from the Greeks until they can provide economic and social reforms that its creditors believe will help bring the country back from the brink of financial ruin.

As a result the IMF, EU and the leaders of the Syriza party have been locked in negotiations since the Syriza party were elected into power back in January of this year. The reasons these talks have dragged on and seem immovable from the front page of your newspapers is because the Syriza party were elected into power on the promise they would renegotiate Greek debt. They are making a show of keeping this promise to appease their own citizens that the delegation is fighting tirelessly on their behalf. But by doing so they are demanding further bailout funds without decreasing spending, these talks are trying to find a middle ground which all parties can swallow.

Last Friday Greece faced a major deadline which was a repayment of some 300 million Euros, they did not pay this. Instead they used precedents set by Zambia which has meant they are now rolling all of their payments due this month, over 1.5 billion Euros, into one payment which is due by the end of June. The 300 million due last Friday was purely repaying some of the interest on their loans. While many analysts believe they could have made this payment, it would have been a push and so how they will be able to find one and a half billion in the next three weeks is hard to fathom.

The following are a few of the possible scenarios and the impact it may have on exchange rates:

Talks Break Down and Greece Don’t Pay

Should it get to the end of the month and Greece are unable to repay their debts and have not managed to agree a deal with its creditors it will have effectively defaulted. This could lead to the much talked about Grexit and could then cause major problems for both the Eurozone and therefore the Euro. Whether Greece were to actually leave the single currency or not, a default will lead to substantial uncertainty surrounding the Euro and is likely to cause major weakness which could present some fantastic opportunities for clients looking to buy Euros.

Reforms are Passed

During the negotiations between the Syriza party, IMF and EU all parties have openly stated they would like Greece to remain in the Euro. However, talk is cheap and only time will tell whether a deal can be reached. In the last few days we have heard that Greece have put a new reforms deal to their creditors which have included some concessions around VAT and pensions, a sign that slowly they are starting to find a middle ground in these talks.

Towards the end of last week the first set of reforms were put forward to the IMF and the EU by Greece, and while a deal was also put forward by these organisations to Greece, both were rejected. However, these opening propositions led the market to believe that a deal was close and the Euro strengthened considerably as a result. The fact the deals were rejected did give Sterling a small boost but with more proposals back on the table it seems the Euro is finding some support as the chance of a deal improves. Therefore should a deal be struck we could see the Euro strengthen significantly against the Pound. Any potential deal could result in Greece’s debts being restructured over a far longer period of time with a much smaller rate of interest making their repayments far more manageable and potentially removing the possibility of a Grexit.

Greece Make Their Debt Repayments

This may be the most unlikely scenario but rumours have done the rounds stating that Greece may borrow money from Russia, China or even sell off some of their Islands in order to repay their debt. This may sound farfetched but considering the consequences of a default they may be left with little choice. Should Greece make their debt payment it is likely to buy more time for them before their next barrage of payments become due and could provide some short term relief for the Euro. Although, this is only likely to be a short term resolution, something we have grown used to during this Greece saga.

The Effect of the Greek Situation on Other Major Currencies

As the Greece situation rumbles on the uncertainty as to whether Greece will stay in the Euro or not is leading to large flows of money in and out of the single currency. The uncertainty this situation has caused led to investors moving their money out of the single currency and into other “safer” currencies and commodities such as the Swiss Franc, US Dollar and Sterling. However, should reforms be passed and the Greece situation be resolved positively, even for the shorter term we could see money move back into the Euro from these currencies.

During these volatile times we have witnessed some of the best times to buy New Zealand Dollars, Australian Dollars, Canadian Dollars and South African Rand partly because of the Greece situation. We can expect far more volatility for all these currencies as the talks with Greece progress. So, regardless of whether you are buying or selling Euros this situation is one to keep a very close eye on as it will undoubtedly continue to affect all the major currency pairs.

To be kept informed of all the latest news surrounding the debt talks in Greece, the exchange rate movement and the options available please call our trading floor on 01494 725353.


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