Grexit and Brexit
Greece has to pay the International Monetary
Fund (IMF) its next loan installment in June.
This is bad news for the country's coffer that is
squeezing blood to pay government staff and pensions. Greek Prime Minister Alexis Tsipras knew he
had a difficult job since day one but it seems to be getting harder as
time goes by. He promised his voters a
new start for Greece and reverses the austerity measures. However, I do not know many people manage to
ask their credit cards to waive the bills and Tsipras is no exception. Tsipras certainly struggles to convince the
German and the French leaders that whatever happened has happened and Greece
can erase the past. The imaginable
positive results maybe the continuation of EU drip feeding minimal nutrition to
avoid Grexit. Time is against the Greek
leader as its country fell back into recession.
There are more local businesses going bust than popping up. Tourism is suffering according to the Association of Hellenic
Tourism Enterprises. Arrivals fell in top tourism
destinations in April by 31 percent in Mykonos to 7 percent in Crete. Depositors are leaving the Greek banks which
discourage the banks to grant loans to individuals or small businesses. The Greek economy is again in a downward
spiral. In April, Moody’s downgraded
Greece’s government bond rating to Caa2 from Caa1 with a negative outlook. Caa2 is many notches below Germany Aaa
rating.
The
voters supported the new government as they were tired of the austerity
measures. Policy changes that create
pain would almost be contradictive to what Tsipras promised. Pension reform, value added tax, staff cut in
government or ideas that reduce government spending and people
income are likely
to cause public uproar. Privatization of ports or other state
owned business could lead to job losses and pension reform. This is because new owners are likely to
prioritize returns for shareholders over local employment and welfare. Remember during Thatcher era,
privatization of Cable & Wireless, British Aerospace, British Telecom and
British Gas. Can Tsipras’ government
manage the same? Realistically speaking, the way to recovery for Greece is painful and
long but doable. EU does not want a Grexit. EU cannot set the case of waiving the debt as
it could be a bottomless pit.
Grexit
has an impact on Euro and many analysts have mentioned parity to the US Dollar. Both in March and April, we saw EUR 1 to USD 1.05. Just when everyone was holding their breath
to watch USD
1 to EUR 1, a rebound in May clicked USD 1.115 to EUR 1. Parity between USD and EUR is possible
with the uncertainty ahead. Even Swiss Francs had to let go of the falling
Euro and the US Dollar has no affection against Euro. There are other catalysts for Euro to go
lower and let’s look at a couple. First is Brexit and
second is Chinese Yuan joining the SDR.
The
Conservative Party has won the election and David
Cameron is putting EU membership to a vote by 2017. British citizens will vote for whether the
Great Britain should leave the EU. “Brexit” if EU does not give GB some flexibility
in EU policies. While
Cameron has not detailed his “shopping list”, the Conservative Party’s election
manifesto and Cameron’s speeches have mentioned fewer barriers to trade inside
EU, having the power to block EU laws, stricter control over EU migrants. It is hard to imagine a Brexit and UK may not
be better off outside EU. However,
similar to the Scottish Independence Referendum, this gives a fair arena for
voters to express their views and there are possibilities to either
outcome. If Grexit happens before this
Brexit vote, the odds could tilt. GBP
has gathered strength against the USD after Cameron’s victory and rebounded
back to 1.55 to 1.58 level (USD 1.58 to GBP 1) in May. This is similar level to November and December
2014. GBP against EUR has been
zigzagging between 1.35 to 1.41 in March, April and May. Brexit has complicated GBP EUR relationship
and it could end up being a lose lose situation.
International Monetary Fund’s Special Drawing
Rights (SDR) is an exclusive collection of global currencies that form a
special reserve asset. Currently, the
asset consists of USD, EUR, JPY and GBP.
IMF reviews the composition of the basket every five years and China is
hoping the Chinese Yuan can join the club.
If this happens, Central Bankers are likely to add CNY to their reserve
which means reducing the weighting of the four currencies that are currently in
the basket. Many people said CNY should
not be included as it is not an open currency that could be bought and sold
freely in the market. One could also
argue that China’s huge size of economy and trading activities with the rest of
the world could justify CNY to be a special breed.
