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MACROECONOMICS

Market is Edging toward Cautiously Anticipating Greek Deal

Market, Edging, toward, Cautiously Anticipating, Greek Deal, macroeconomics, Greece, Merkel, fx trader, forex

10 Jul 2015

It was Greece's call for a referendum, and then the outcome, that increased the risk of a Greek exit from the monetary union. Many now assume that a Greek exit is the most likely scenario. 

We suspect that many misunderstand the incentive structure, and under-estimate the political will to ensure EMU remains irreversible. We argue that there a no pleasant choices left for both creditors and Greek people.

Some kind of debt relief is going to take place. It can come either in an uncontrollable and disorderly way or it will be negotiated and managed. The Greek people may have voted against creditors' conditions, but are going to face years of hardship and a wrenching of the social fabric regardless of the monetary arrangement. Greek banks will need to be recapitalized whether Greece is in or out of monetary union.  

In 2011-2012, the betting odds that Greece was going to leave EMU were reportedly as high as 70%. We argued then and continue to believe that key considerations like outside the financial and economic calculus investors are so familiar. Many observers do not appreciate Draghi's insight that monetary union is first and foremost a political union. There is much determination at the highest levels of Europe to preserve the integrity of the monetary union.  Of course, there are dissenting voices in nearly every country, and many are exasperated with the Greek drama. 

 

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