Grexit harmful for the eurozone in the longer-term – KBC

FXStreet (Barcelona) – With Grexit related risks rising in the past days, the KBC Bank Research Team comments on the possible reaction in the FX and bond market space.

Key Quotes

“The developments of the past three days have brought a Greek default very close, but there is still room to get out of this messy and chaotic situation. In any case, uncertainty will reign in the next days and new unexpected developments cannot be excluded. A default is not necessarily the end of the Greek euro area membership either. The treaties don’t provide rules for such situation. Of course, after a default, chances Greece will leave the euro area prime as they might start printing their own currency.”

“Given these uncertainties, risk‐off sentiment should dominate markets today and in the next few days. However, investors might be cautious before trading on a Grexit and wait for further signals from the players involved. Nevertheless, most investors were not positioned for such a kind of uncertainty and will look to protect themselves against a possible Grexit. There are still so many unknowns and the situation may continue to change hour by hour as we saw in the weekend.”

“Overall though, risk‐off sentiment means German Bunds are favoured and so is spread widening in the peripheral bond markets, which the ECB will closely monitor. Also non‐German core and semi‐core bonds may show a modest spread widening. The euro and equities should be under pressure too, as well as all riskier assets. Gold should temporarily) profit.”

“Whatever the ultimate outcome, we don’t expect a repetition of the turmoil in 2010‐2012/3. Contagion will be more limited, as Greece is small and not essential for the euro area and its debt is primarily held by official creditors. Risks for the banking sector are small.”

“Longer term though, a Grexit would be very bad for the euro area as its suggests that the euro area is no genuine monetary union, but simply a system of fixed FX exchange rates that may periodically be adapted. It might also have an impact on the British EU referendum that is still a bigger threat for the EU. Such a longer‐term Grexit remains a risk whatever the shortterm outcome.”

With Grexit related risks rising in the past days, the KBC Bank Research Team comments on the possible reaction in the FX and bond market space.

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