by Dave Evans of binary.com
As Lithuanian president Prime Minister Algirdas Butkevicius withdrew a crisp new 10 euro note just after midnight on 1st January, fireworks erupted and people reportedly cheered. You have to wonder why.
There is an undeniable excitement with new beginnings and few will begrudge Lithuania’s enthusiasm as they became the 19th nation to adopt the euro. Still, with the Eurozone still lagging its principle trading partners and political uncertainty in Greece, it will be interesting to gauge the mood of the people in 18 months’ time. If the first two trading days of 2015 are anything to go by, the euro could be in for a rough ride as it has dropped nearly 1.5% in value already.
EUR/ USD
As Lithuania enters the euro, so Greece may be heading to an exit.
There has been speculation this week that German Chancellor Angela Merkel is now more relaxed about the prospect of a Greek exit. Such thoughts have been denied in public – they have to be after all to maintain European ‘solidarity’ – but the prospect of a ‘Grexit’ does seem to be inching closer to reality.
Greece should never have entered the euro.
This much is well documented and evidenced by the country’s problems since the eruption of the euro crisis. Using complex financial arrangements and sky high projections, Greece was able to bluff its way into the euro club. The country was “gilding the lily” on a massive scale and is still now paying the price for its excesses.
Except it hasn’t technically paid the full price and here we get to the heart of the argument. Greek debt has taken many ‘haircuts’ and been provided with many extensions by the Troika (ECB, IMF & EU). Incredibly, Greece is currently paying 2.4% on its debt, while Germany is paying 2.7%.
Yet even with these conditions, the impact on the Greek population has been particularly hard, with a number of brutal cuts made to the social fabric.
The population wish to register their disgust at these cuts, while the creditors, especially the German financial institutions, are frustrated by the lack of progress with the required reforms. Of course the medicine is hard the creditors say, it has to be to warrant the help being received.
Seen this way, Greece is a very unhappy patient and Syriza party leader Alexis Tsipras stands on the brink of an election victory promising billions of euros of public spending. Billions of euros that Greece does not have. A euro exit would free the Greeks from tyrannical ‘Troika’, at least in the eyes of some of the population, while the creditors may be ready to turn away.
At the height of the crisis, a Greek exit was completely ruled out due to the potential for a domino effect across other troubled countries, such as Ireland and Italy. Those nations are now on a much firmer footing, while the Stability Mechanism is acting as backstop.
A Grexit would be far from painless however, with Greek debt payments ballooning when taken on by a devalued new currency. Still, the Troika may have their hands tied as the euro crisis becomes a political crisis. As the legendary George Soros warns:
“Everyone knows that (Greece) can never pay back its debt”
He has further added that the situation in Greece resembles post WWI Germany, which was pushed too hard for repatriation by France. This hard line stance led to political extremism, a trend mirrored by the rise of Golden Dawn.
Bold action must be taken by the EU and ECB, but neither of these entities have shown much talent for this. Obfuscate and survive another year seems to be the general strategy, a strategy that points to further downside for the euro in 2015.
A good way to play this situation could be a LOWER trade predicting that the EUR/ USD closes 2015 below 1.1500 for a potential return of 219%. Or put another way, betting that the EUR/ USD will drop and close below 1.1500 on December 31st 2015 could return £31.93 for every £10 put at risk.
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