Were all forex geeks too busy partyin’ for my homeboy Dirk Nowitzki’s win this week that a credit downgrade for Greece passed with very little fanfare in the charts? Yup, you read that right! Credit rating agency S&P dumped the debt-ridden country’s status to CCC from B, making its bonds the lowest-rated in the world!
It wasn’t anything new. As Pip Diddy talked about in his blog yesterday, almost everyone saw an S&P downgrade coming. After all, other credit ratings agency had already downgraded Greece’s score before.
With all the headaches Greece is causing the EU officials, it’s not much of a surprise that talks of its exit from the euro zone have come back into vogue.
Market junkies think that in order for peripheral countries to be at par with the EZ hotshots like Germany, they have to leave the euro zone. Since Greece joined the euro bandwagon ten years ago, it has lost its competitiveness. In order to make up for the stack of trade deficits that it has scored, it needs to devalue its assets which it can’t do inside a monetary union.
They suggest that the Greeks bring back the drachma, Greece’s previous currency, and then set it at a lower exchange rate to help boost exports and generate revenue from tourism. A pretty good deal, don’t you think?
But if exiting the euro is so beneficial, then why hasn’t Greece jumped off ship a long time ago?
Well my young padawan, it’s not that simple. For one thing, Greek depositors will be forced to hold drachmas if the country says sayonara (or αντίο) to the euro. Since the drachma would be cheaper than the euro, consumers and companies exposed to Greek assets will have little choice but to take write-downs.
And that’s only the beginning. Remember that other euro zone members are also exposed to Greek debt. If PIIGS nations like Portugal and Ireland, or even the ECB itself are forced to take write-downs, the euro region would be risking the chance of more periphery countries defaulting. Not to mention that it would take a toll on investor confidence for the ECB and the common currency.
A more Disney-esque reason why it’s beneficial for the euro block to let Greece stick around is the possibility of a happy ending for the Greek drama. Recall that EUR/USD rallied strongly a few days back when euro zone officials hinted that they’re closer to solving the Greece’s debt drama. Imagine how much more bullish investors would be if they actually solve it!
A big huddle is set to happen in the EcoFin meeting in June 20, and many market junkies are expecting a concrete solution. What do you think will the euro zone officials decide on? Should they let Greece stick around? Hit me up on Twitter and Facebook, or even the box below!