Monday, 22 June 2015

How solution to Greek crisis could affect exchange rates

Monday 22nd June 2015 
This week, and today in particular, is quite a critical one for Greece, and the GBP/EUR exchange rate along with it. Many headlines are suggesting that this is the ‘Last Chance’ for Greece. There have been many of these before, and I don’t think today will provide a complete solution. 

What exactly is happening in Greece? 


They need to make a debt payment of €1.6 billion by next Tuesday, 30th June. However to be able to actually meet that payment, they need to get a further €7 billion in aid, and that’s what they’re trying to agree today, however to get the funds, the Greeks need to reform pensions and cut spending, which is difficult for their Prime Minister Alexis Tsipras to agree to, given he was elected on the premise of ending austerity. 

Early this morning, he met the leaders of the IMF, ECB and EU commission to outline his proposals. Just before lunch, the EU’s finance ministers started a meeting to see if they can agree on a deal to give Greece the bailout funds they need. Later this evening at 6pm all the EU leaders meet for an emergency summit to debate the crisis. 

How could Greece affect the GBP/EUR exchange rate? 


The uncertainty over Greece’s ability to obtain bailout funds has meant there is a risk of them leaving the Euro. This fear has been keeping the Euro weak, and that’s why the GBP/EUR exchange rate has been hovering around the €1.40 level of late. 

If they reach an agreement later today, or later this week, then I would expect the Euro to strengthen and cause the GBP/EUR rate to fall. However we’ve seen quite a few of these ‘last chances’ for Greece, and it could be that this weeks meetings simply kick the can down the road a little further, without actually sorting out the fundamental issues. If so, expect rates to remain supported. With worried Greeks currently withdrawing their savings from the banks in huge amounts, it's clear that a solution needs to be founds quickly. 

Personally I think they will all agree a way forwards sooner or later, which could mean the current GBP/EUR levels may not last for long. 

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