Grexit

Greece’s debt crisis is back in the headlines, and it could heap yet more woe on a beleaguered eurozone. Find out the effect on the markets, and take a position with IG Bank.

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Why is it important to traders?

Grexit last reared its head back in 2015. With Brexit and potential Frexit, Nexit or Italeaves to deal with – not to mention the rise of Donald Trump and key elections in its biggest economy, Germany – you’d be forgiven for thinking that Europe is facing bigger problems than Greece’s possible departure from the eurozone.

But to let other issues overshadow Grexit could prove to be a grave mistake. Europe’s current predicament only raises the stakes for Greece and the euro, as well as adding further complications to negotiations.

Whether those negotiations sail as close to disaster as they did in 2015 remains to be seen, and looks unlikely. But with each successive failure to find a long-term solution to Greece’s woes, the need for a new way forward becomes clearer. And that new way forward could mean Grexit.

Markets that may be affected

Markets Sell Buy Updated Change
Greece 25
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Germany 30
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France 40
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Spot FX EUR/USD
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Spot FX EUR/GBP
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Commerzbank AG (LSE)
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BNP Paribas SA
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Credit Agricole SA
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Spot Gold
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Prices above are subject to our website terms and conditions. Prices are indicative only.

Why is Grexit back on the cards?

Greece is currently supported by loans from a ‘troika’ of lenders: the European Central Bank (ECB), International Monetary Fund (IMF), and a fund sponsored by several European governments (most notably Germany, France and Italy).

In February, the IMF raised doubts about Greece’s ability to meet the terms of its loans without further austerity measures. IMF involvement is required in order for the rest of the troika to close the current review of their third Greek bailout, giving Greece the funds it needs to meet €6.3 billion in bond repayments due in July.

On 20 February, Prime Minister Alex Tsipras signalled that he is willing to make the necessary cuts, with European ministers agreeing to wind back some austerity measures in return. That has raised hopes that a solution will be found soon – but it remains to be seen whether Tsipras’ deeply unpopular government can implement any further cuts.

What could the impact be?

The last time Grexit hit the headlines, Angela Merkel and Tsipras pushed the crisis to the edge before Tsipras was finally forced to back down and accept harsh loan terms.

During that time, stock indices around the world tumbled, the euro was deeply hit and the Greek stock market was forced to close. Meanwhile, bond yields skyrocketed. Expect that situation to be repeated if negotiations fail once again, which could be good news for safe havens like gold.

If a lasting solution is found, or even if Grexit materialises in a calm, measured manner, we should see some relief across European markets as a long-standing issue is resolved. But if Greece ends up tumbling out of the currency union, the effects could be chaotic and damaging.

Importance of European elections

Further complicating matters is the swathe of elections across Europe. Any signs that the Greek crisis is being mismanaged will be leapt upon by Eurosceptic insurgents, and existing leaders in key European states will be unwilling to accept any resolution that would prove unpopular with voters at home.

That adds an extra edge to how Grexit might play out on the markets – meaning it could have wider repercussions in 2017 than two years ago. Watch out for movement in the euro, European indices, and bond prices around the following key milestones:

15 March: Dutch election

The Dutch election on 15 March marked the beginning of ‘election season’ in Europe, which was seen as potentially problematic for negotiations. A victory for pro-EU Mark Rutte over Geert Wilders, though, means one potential pitfall has been avoided.

23 April: French election first round

Fears that Grexit could lead the euro to crumble are much more real now than they were in 2015, but the threat from Marine Le Pen is arguably far greater. While negotiations are unlikely to hit crisis-levels before the French go to the polls, any sign that a resolution is proving illusive – or that Greece is being let off lightly – would be seized upon by the National Front leader.

Should Le Pen win out in the second round of voting on 7 May, Grexit could fast become irrelevant. She’s promised to take France out of the euro, and wants to disband the single currency.

July: Greek capital runs dry

Greece’s debt talks are still some way from reaching crisis point. In July, that will no longer be the case.

By then, Germany’s federal elections will be on the horizon. Greek debt is a major talking point in Germany, so there is a huge incentive to get Grexit off the agenda before campaigning begins in earnest. If talks do continue right up to the deadline, German negotiators may be forced to take a harder line. That could prove disastrous for Greece. 

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