What happens to Euro if Greece defaults ?

[KidKruger]

I'm interested in what the range of consequences you believe are likely in the event if Greece fails to meet it's sovereign debt obligations and actually defauls.

What will happen to the value of the Euro ?

If the Euro is 'suspended' (I think that's the term I've heard used) how do those countries using the Euro operate financially ?

I'm sure there's many possible outcomes, but what, in your opinion, are they likely to be ?

[Huguenot]

The value of the Euro would rise if debt laden countries opt out - damaging the export economies of countires within it.

[HAL9000]

That's what I've been thinking; since it hasn't already collapsed, it'll probably go up.

Sell the rumour, buy the news.

[Jeremy]

There would be chaos. Bond prices would plummet, as lenders would now require inflated yields. Market confidence in the Euro would take a big hit, anticipating a shortage of money, QE, and devaluation. I wouldn't rule out the collapse of a few European banks (half of Greek national debt is with German banks).

[Huguenot]

I think some commentators suggested that most banks would have to be nationalised - a domino effect starting with the French, but probably not including Germany.

Whilst this sounds scary, it's worth remembering the France has nationalised its banking industry before - as recently as 1982, and the world did not end and the sky did not fall on our heads, and we did not all starve to death. They were privatised again 4 years later.

[KidKruger]

So speculators may with to buy Euros in hope of a big win ?

[Jeremy]

I'd be very surprised if any serious investor did that.

[HAL9000]

I'd be very surprised if any serious investor hadn't already established well-leveraged positions in the Euro and its derivatives, [ETA] either long or short or as part of a more complex strategy.

It?s the only game in town.

[????]

..the markets would start looking for the next failures

....Portugal (tu)

....Irealnd (tu)

er....Spain :-S

...Italy ::o

[????]

If that's the case Hal why is the Euro still tanked?

[Huguenot]

The Euro is still low because traders are not convinced it is going to break up into a two tier Europe.

They believe that it is more likely that either a secured bailout fund or bank nationalisation will allow underperforming economies to stay within the Zone, and thus hold the value down.

Germany and France both want the value to remain down to aid exports and they are the chief drivers in the process.

The value will only soar if it's considered inevitable that the preipheral nations will drop the Euro.

So Quids it means currently that whilst the markets may share your conviction that they can try and roll a few more countries for entertainment and greed, they're not so sure they'll be successful.

[????]

Huge, most buyers of Sovreign debt aren't a few overpaid hedgies or desperate geeky day traders as you genuinely seem to believe. The majority are the standard major investors who were traditionally attracted to Sovreighn debt at it is historically safe for excess cash albeit for poorer returns - so pension funds, Sovreign wealth funds, banks investment (not trading arms); building societies, savings banks, corporate funds etc etc. They are are now scared of much sovreaign debt and so are putting their money into the 'bankers' which includes A1 Corporate equity,Corporate bods Commodities and in SD terms at the moments Switzerland, Germany...and, amazingly us. Investors are actually in net terms now paying to park their cash in 'these safe havens' bonds

No-one wants Greek debts or increasingly Portuguee, Italian and Spanish debt without a huge interest rate becuase they are genuienly convinced that they won't get paid back as the sums don't add up not some bizzare 'market' entertainment greed conspiracy theory that you seem to expound? You're not normally an international CT theory nutter

Markets are just being rational pulling their cash out of investments that are looking dodgy and putting them in safer places, I'd be happy with them if it was my cash/pension fund.

From the ERM to Greek debt they are just looking at numbers and saying the politicians may bluster, talk and stand firm but looking at the numbers we believe that thid is ther outcome so we'll take a position; sell our existing holdings etc.

Greece* is in trouble because it borrowed too much money too cheeaply that it can never realistically pay back not because a whole load of Norewigan Hedgies in Mayfair are trying to get another Porsche at the weekend- simples. So cease with your SWP type moanings that it's all a result of malipulative currency traders, it's rot!

*insert at least another 4 Eurozone countries

Would you be happy if your investement manager said he was putting your cash/pension into say Spanish bonds for a 6% return right now? Would you be saying that's a great return given the state of the Spanish economy? Or you think German and French largesse will extend that far? Too many risks for me I'd be selling.

If the markets see something that makes no sense they will rightly try and profit on it - I isee Man City available for 10/1 for the Premiership I'm on it - Soros did that back in 199? becuase hea said there's no way that ? can be at that value despite what Lamont/Major et al tried to say. Basic truths not market manipulation innit.

So either 3-4 leave the Euro or Germany stumps up - go have a punt.

[????]

PS Don't get me wrong there are players like vulture funds buying haircutted bonds and trying to stall negotitions to up the %pay out a bit (which is pretty greedy unattractive behaviour) but that's not the cause of the Sovreighn Debt crisis which is just down to Mr Micawber's wise words.

[El Pibe]

"No-one wants Greek debts or increasingly Portuguee, Italian and Spanish debt without a huge interest rate becuase they are genuienly convinced that they won't get paid back as the sums don't add up"

I do find this a bit odd. Whist I obviously get that higher risk requires greater return, I don't see why anyone would buy it if they think there's no chance of a return. You can quote yields of 1,000,000% if you like, doesn't matter if defaulting is inevitable.

Plus it seems to me that there's an element of self fulfilling prophecy about demanding higher yields from nations who look like they can't sustain their levels of debt.

Also it's a little unfair on Spain that has comparatively low levels of sovereign debt, I realise it's tax receipts are down but I wasn't under the impression it was in any imminent danger of defaulting.

Just random, thoughts really.

On the defaults in general my gut instinct says it won't be apocalyptic but may be a necessary step in resetting many economies (though doubtless will be followed by a Euro break up of some degree), and preventing it has more to do with political principle, getting German and French creditors paid (Greece alone has a multi billion pound deal for tanks and helicopters it has yet to cough up for) and the aforementioned hopes of keeping the Euro low.

I did see an interesting graph about levels of historical levels of sovereign debt and sovereign defaults that rather suggested it's inevitable given the current situation.

[Huguenot]

Well regarding the 6% Spanish bonds thing I think there are several issues, bearing in mind that nobody's asking a company to put all it's money into Spanish bonds - in fact barely a fraction is required to keep Europe running.

Firstly pension investments are over 25 years, not 2 weeks, and I think any problems with the Spanish economy over 25 years are going to apply equally to most other developed nations.

Secondly is that on a european portfolio Spain would only comprise 6% of total bond purchases to be proportionate, and Greece would only comprise 1% - so a comparatively 'high' risk in Spain or Greece is only a tiny proportion of the overall investment.

Finally is 6% high enough? Well it needs to be in line with the risk - do I think there's a 1:20 chance of Spain entering into a massive disorderly default with the attendant debt write offs?

No I don't.

It looks to me like major institutions may be indifferent to the 20% collapse in economic value they generated themselves 2 years ago, and are now kicking up a stink over bond purchases which may impact their profitability by 0.5% when it suits them.

Well, actually, I don't think that at the moment - because they seem to be playing ball.

[Jeremy]

Greece exiting the Euro may bring stability long term. But if Greece default, in terms of immediate impact, it will be hit hard. If you're going to take a directional view on the Euro, it would have to be short.

As HAL9000 is presumably alluding to, trading the volatility is bound to be a more common strategy.

[HAL9000]

I've just grabbed this weekly-scale chart of EUR/GBP to illustrate the up and downside potentials. 33:1 leverage is still available in the forward market. There's little or no support/resistance on either side. For those with the balls, there's more than enough potential to make a killing and retire - if one gets the breakout direction right.

It may be possible to take a deep-out-of-the-money put and call position on this and still make money whichever way it goes - if the timing is right.

 

[Huguenot]

UDT will do it, he knows about these things.

Why doesn't everyone just do what UDT does? ;-)

[Undisputedtruth]

The chart doesn't look good for the Euro and I'd expect to see it break through the 0.897 support level to 0.7750 quite soon.

[HAL9000]

You could be right - short term.

Traditional technical analysts would probably interpret that chart as bullish over the long term - even if the price were to dip below the 2010/07 low.

It's an ambiguous pattern, though. That could be a 3-year half-way flag signalling an upside move to 1.25-1.30 or it could be an unusual-looking bull market top threatening an imminent downside break to 0.6000 or lower.

Does anyone else fancy calling this one?

[Jeremy]

I agree that it's ambiguous - but I don't hold technical analysis in high particularly high regard anyway. It's pretty much the banking equivalent of astrology.

As for your suggested strategy, Hal... a wide straddle like that sounds extraordinarily risky, I hope you won't be putting your life savings on that one!

[Huguenot]

Without a doubt pan-european political decisions are going to gave a greater impact on this than mathematicians looking for patterns in the aura.

Both of the two soothsayers above have been ridiculing city financiers whose expertise is statistically proven to have no impact on the success or not of their trades - and yet now there both claiming they can do it by feeling the woo of the gradient.

*shakes head*

[Jeremy]

Huguenot Wrote:

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> and yet now there both claiming they can do it by feeling the woo of the gradient.

hmm... where did I claim that? Or Hal, for that matter?

As you say, it's dependent on the political situation, and nobody know how that will pan out!

[HAL9000]

No one who has worked in the front office would ever say that out aloud. Charts are the greatest sales tools ever devised - clients love them. (When I started in this business, that's all we had. We had to draw them by hand, too.)

True - if the Euro stayed where it was, both legs of the straddle would expire worthless - that's why the smart players only speculate with other peoples' money.

[HAL9000]

Jeremy Wrote:

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> Huguenot Wrote:

> --------------------------------------------------

> > and yet now there both claiming they can do it

> by feeling the woo of the gradient.

>

> hmm... where did I claim that? Or Hal, for that

> matter?

@Jeremy - fear not, a Vortex scan analysis of the piece of fairy cake I was supposed to be having for my tea (will H get that reference, I wonder?) suggests that the ?dog with the boner? was having a wag at UDT and me.