Greece could leave the euro-zone after the US elections. This speculation isn’t necessarily related to the report that Europe wants to help Obama get re-elected. There are quite a few other reasons that support a Grexit in upcoming weeks – some are directly related to the elections, and other are just related to the timing.
Here are 5 reasons why Greece could exit the euro-zone quite soon:
- Coordination: Let’s start with the elections: a Greek exit of the euro-zone is a huge event, despite Greece’s small size. It sets a precedent for a country leaving the euro-zone, and will likely result in losses on money lent to Greece.
The shock waves from such a big event will be felt all around the world, including the world’s No. 1 economy: the US. A Grexit has implications for US banks and for the US economy. It is impossible to believe that EU leaders would not coordinate such a move with the US, a close ally. In addition, the US is also invested in Greece via the IMF.
In order to better coordinate this move, leaders in Europe need to know who will be the next occupant of the White House. This doesn’t necessarily mean that the policy on Greece and the EU would be different under Obama or Romney – only that Europe needs to know who to work with. And now they know: Update: Obama is re-elected – EUR/USD jumps towards resistance – will the dollar continue weakening, or could this turn around?
- Endless delays: So far, many tentative deadlines for reaching a deal: a Eurogroup meeting on October 8th, an EU Summit on October 18-19th and quite a few Eurogroup or EWG meetings have failed. The latest report is that a Greek bailout deal is not expected at the summit on November 12th. It looks like there are problems cutting a deal, but it could also be a deliberate delay.
It’s important to remember that Greece is set to run out of money soon: According to some reports, the date is November 16th, and according to others, it is the end of November. These deadlines are not exact – in the past, Greece discovered it could actually take more time. Nevertheless, there is no doubt that the country is running out of money without the next tranche of aid worth 31.5 billion euros.
- End of the autumn: the head of the Eurogroup, Jean-Claude Juncker, said that he sees Greece staying in the euro-zone “at least until the end of the autumn, and after that, too”. That was in the hot days of August. We are closer to the end of the autumn now. This ominous statement will be tested soon.
- Greece reaching its limits: the troika wants Greece to pass labor reforms, that some coalition members reject. Even if the laws pass the vote in the Greek parliament on Wednesday (when there is a general strike), the government is losing support. In addition, a Greek court said that these reforms may be unconstitutional. If they really are, is there time to change the constitution? Or time to find another solution?
- Germany reaching its limits: The IMF reached a conclusion that for Greece to reach its targets, another debt restructuring is needed, and this time, for the official sector (OSI), that holds most of Greece’s debt. This means that euro-zone governments will have to take a loss on their loans to Greece. How will that go down in Germany? Not so good. Germany’s ability to extend and pretend is also reaching its limits.
What do you think? Could Greece leave the euro-zone soon? Or will we see another can kicking exercise?
Further reading: How to trade the Grexit with EUR/USD.