Euro zone crisis can be contained even if Greece leaves the monetary union
Thanos Papasavvas, Fixed Income & Currencies Strategist at Investec Asset Management believes the country's exit from the euro zone looks increasingly likely, and discusses the broader impact of such a move.
As the elections in Greece approach on 17 June, the country's exit from the euro zone looks increasingly likely, believes Thanos Papasavvas, Fixed Income & Currencies Strategist at Investec Asset Management. Whilst disastrous for Greece it would not necessarily be disastrous for the euro zone as long as France and Germany remain united and committed, in his view.
"Greece will most likely vote against austerity measures or fail to form a credible government with a mandate to press ahead with the restructuring," Papasavvas explains. “The consequence of this will be deprived liquidity from the ECB, hence the need for the Greek government to start issuing a new domestic currency to pay wages and pensions.
"The new currency will run in parallel with the euro but will devalue significantly leading to further austerity and inflation". He is convinced that the cost of breaking up the single currency, even bearing in mind the unintended consequences of this happening continues to be far higher than the cost of keeping it together. He notes that Germany would be the biggest comparative loser in such a scenario, partly because the breakup would trigger a depression in Europe and a recession in global economies, but also due to the excessive appreciation of a potential new currency which would make Germany uncompetitive in Asia, the US and the rest of Europe.
"I can only hope that the Greek population understands the implications of their decision at the ballots and don't harbour false hopes as to the outcome of the elections. An exit from the euro zone will most definitely make it even more unlikely for Greece to successfully address its problems such as the excessive number of public servants, its inefficient tax system and corruption," Papasavvas says.
As far as France and Germany are concerned, Papasavvas expects a compromise between Elysee and Berlin after M Holland wins the second round of the French legislative elections. "This will entail maintaining the existing fiscal pact intact, albeit with some flexibility on the target dates, but with a new growth pact alongside it. I expect some guarantee of deposits in national euro zone banks, an increase in the capital of the EIB as well as issuance of infrastructure bonds," Papasavvas continues. Pure euro bonds, however, will only come to fruition in due course after further fiscal and political co-ordination is agreed amongst the member states, he believes.
Finally, regarding the recent Euro 100bn “credit line” to Spanish banks, the market correctly saw this as a temporary fix to avoid further sentiment deterioration ahead of the Greek elections on Sunday and the forthcoming European Council meeting in late June. For the market to be positively surprised he believes we need to see firm commitment towards closer fiscal and political union, and asks the question, “Will France be willing to negotiate on that?”
Investec Asset Management has maintained a zero exposure to peripheral Europe since the beginning of the crisis, preferring instead to utilise that risk in high quality corporates in defensive sectors as well as emerging markets.
