6 Jan 2016

Greece is going to polls and maybe out of the Euro – Should INR Worry?

linkedIn Logo twitter logo

Greece is in the news as the country is going in for general elections. If the ruling party does not get majority and if the anti austerity party wins, the country could default on debt and maybe even go out of the Euro.

author dp
Arjun Parthasarathy

Greece is in the news as the country is going in for general elections. If the ruling party does not get majority and  if  the anti austerity party wins, the country could default on debt and maybe even go out of the Euro. The result of Greece going out of the Euro could be fresh market volatility with safe haven buying into the USD and that could bring pressure on the INR. Should the INR worry on Greek Elections?

Greek bond yields have risen sharply even as its stock market has tanked on news of Greek elections. Chart 1 and Chart 2. Financial markets saw a bit of volatility on Greek bond yields spiking but this volatility is nowhere close to the volatility seen in 2011, when the markets tanked on worries of a Euro collapse. 

Financial markets have effectively isolated Greece at this point of time. Chart 1 shows that even as ten year effective benchmark Greek bond yields spiked, bonds of the indebted countries of Portugal, Ireland, Italy and Spain held steady at lower levels. Bond yields of these countries have fallen to record lows on the back of the ECB pledging to keep rates at all time lows for extended periods of time. 

Global equities exhibited a bit of volatility this week but that was largely due to crashing oil prices that have fallen to levels last seen in 2009 on the back of OPEC maintaining supply even as demand has slowed down.  Equity indices from S&P 500 to Shanghai Composite fell by 2% to 5% on worries of slowdown in the global economy and profit taking at higher levels.

Why are financial markets almost indifferent to Greece now? The reason is that after the debt restructuring by Greece in 2012, most of the Greek debt is held by the ECB, European Union (EU) and IMF. The private sector including banks holds an estimated EUR 30 billion of Greek debt.  The most likely scenario is Greece defaulting once again on its debt or seeking a debt restructuring package, which would involve the private sector to take a haircut on its debt holdings.

Greece debt to GDP ratio is 175% and with the economy seeing recession for the last six years, the country is unlikely to have enough revenues to service the debt. Unemployment rate at 26% is also impacting the economy. The country grew 1.7% in the third quarter of this year but could again slip into recession if its debt problems surface again.

In 2012, at the time of restructuring, the private sector held around EUR 206 billion of Greek debt and that default fears gave rise to market volatility. This time around, the banks can easily take a haircut on its EUR 30 billion of Greek debt.

The Euro is down to levels of EUR 1.24 to the USD, close to its bottom of EUR 1.20 seen at the height of the Greek debt crisis in 2012. However the fall in the Euro is due to ECB maintaining rates at record lows even as the Fed is contemplating rate hikes in 2015. A weak Euro is positive for the Eurozone as it helps in its exports. Greece will also benefit as tourism picks up on the back of the weak Euro.

Greece will be isolated by the market and it will have to find its own lonely path within the Eurozone as it grapples with its debt.

The INR will move on domestic factors such as budget 2015-16, growth and inflation rather than Greek exit of the Euro.




Information herein is believed to be reliable but Arjun Parthasarathy Editor: does not warrant its completeness or accuracy. Opinions and estimates are subject to change without notice. This information is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The financial markets are inherently risky and it is assumed that those who trade these markets are fully aware of the risk of real loss involved. Unauthorized copying, distribution or sale of this publication is strictly prohibited. The author(s) of the content published in the site may or may not have investments in the assets discussed in the pages/posts.

Copyright © by Arjun Parthasarathy 2019-2024