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What Will Happen When Greece Leaves The Euro


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Euro Break UpWhat will happen when Greece leaves the Euro? That is a question that is on many traders and investors’ minds, as a Greek Exit from the Eurozone economic bloc and Euro currency seems to be growing more likely with each passing day. What once seemed like a remote possibility, seems more and more likely as the European Union creditors and the leftist Greek government have made little progress on coming to terms regarding an agreement that will release additional funds to Greece. Beyond the political rhetoric and posturing, there are a number of real indications that a Grexit from the Eurozone and Euro currency may happen before the spring of 2015 is over.

What Will Likely Happen When Greece Leaves The Euro | The Internal View

Since it is growing more likely, traders and investors need to consider what will happen when Greece leaves the Euro. What happens internally within Greece and what happens in other countries will be totally different.
Grexit

Internally, leaving the Euro is going to be hard medicine for Greek citizens to swallow in the short run, but in the long run it may be just what the doctor ordered to get their economy growing again. In the short run, Greeks can expect economic chaos and massive losses in their savings accounts, as the country reverts back to their own currency, perhaps the historic Greek currency known as the drachma.   In the long run, things likely will not be so bad. With control over their own currency, the Greek economy will have a currency with a realistic valuation. This will eventually lead to a return to economic growth, as foreigners see good value in Greek goods. The tourism industry in particular should see a nice uptick, as foreigners will be able to get good value when they travel to Greece.

What Will Likely Happen When Greece Leaves The Euro | The External View

What will happen in other countries both inside and outside of Europe is unknown. What is known is that the exposure that European governments and banks have to Greek debt is not as bad as it was in 2012, when Greece came close to defaulting and underwent a debt restructuring.

The European Union has been kicking the Greek debt can down the road for three years for good reason. Their delay in dealing with the Greek debt situation has allowed them to reconfigure things, so that a Greek debt default will not have as large an impact as it would have had if it had occurred several years ago without preparations. However, nobody knows for certain whether the European Union has done enough to wall-off financial institutions in Europe from a Greek debt default. Therefore, there may be some unpleasant surprises should Greece wind up defaulting and leaving the Eurozone in the near future.

The worst-case scenario is that a bank run develops in other weak European economies, which causes economic chaos in those countries and slows down already tepid economic growth in the European Union. That does not seem likely though because of the moves made by European financial authorities. Since 2012, the European Central Bank has set up financial institutions and mechanisms to aid member states that find their banking systems in trouble. This backstop has helped weaker Eurozone countries to shore up their banking systems and provide a level of confidence in their banking systems that should be enough to prevent runs on their banks.

Greece Leaving The Euro Could Cause Long Term Damage

The real concern of European Union members is not so much losing the tiny economy of Greece, but the potential implication that a Grexit night have on other countries that are in the Eurozone. The European Union was set up in a manner in which member countries were not supposed to leave. By setting a precedent with a Grexit, other weak member countries may be more inclined to leave the Eurozone, especially if populist parties are elected within those countries. This is the primary reason why European Union leaders have tried so hard to keep Greece in the Eurozone.   There is the potential that a Grexit could eventually lead to the unraveling of the European Union.

How To Trade a Grexit From The Euro

Greece Leaves The EuroWhat is the best way to trade a Greek exit from the Euro?   The answer depends upon your trading outlook. Short term traders can make money off any volatility that follows a Grexit. Swing traders that trade in the medium term, can position themselves for likely market swings that may prove to be profitable trading opportunities.   For those with a longer outlook, such as investors, a Grexit may provide an excellent opportunity to establish or add to positions in European equities.

Short Term Traders – Consider buying volatility Exchange Traded Funds (ETFs) that increase in price when stock market volatility picks up. While any volatility associated with a Grexit may be short-lived, it will likely be sharp enough to cause a tradable price increase in volatility Exchange Traded Funds (ETFs), such as ProShares Trust VIX Short-Term (Symbol:   VIXY) and Velocity Shares Daily 2x VIX Short Term (Symbol: TVIX).

Medium Term Swing Traders – Consider shorting European bank stocks that have Greek debt exposure. Also consider shorting European and emerging markets Exchange Traded Funds (ETFs). A Grexit will likely cause these securities to decrease in value.   Once the situation stabilizes after a Grexit, these same securities could provide good rebound opportunities on the long side.

Investors – Investors should not view a Grexit as a trading opportunity. Rather, they should consider a Grexit as an opportunity to put money to work in the stock market. A Grexit will likely cause European stocks and related funds to drop in value. This drop may provide a good opportunity to invest in Europe for the long haul.

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One Response to “What Will Happen When Greece Leaves The Euro”

  1. Hiranjgarbh K K Missier says:

    I am afraid that if Greece leaves the EURO many more countries can follow. Maybe even Italy and Spain will see this as an alternative. The trust in the EURO currency will also be completely smashed by a Greece exit. At the moment investors loose confidence in a currency, its doomed. Hiranjgarbh K K Missier

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