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Impending Greek Bankruptcy
The disorderly political situation in Greece very likely gives us an impending Greek bankruptcy. This is important because it will mean that Greece will leave the European Union. All of the herculean effort of the last two to three years in the Euro Zone has been to forestall exactly this possibility. The concern is that the impending Greek bankruptcy will lead to a Spanish bankruptcy followed by bankruptcies in Portugal, Ireland, and Italy. The European Union could come apart at the seams. All of this sounds very dramatic but what does the impending Greek bankruptcy have to do with trading foreign currencies? The resulting Euro Zone economic contraction will likely send waves across the currency trading world.
Now or Never
After the painfully negotiated bailout of the Greek financial system, Greece is supposed to institute fiscal austerity measures. Greek voters may have effectively blocked that from happening by voting for a range of candidates across the political spectrum who may well decide that their political future is tied to pleasing voters and not the International Monetary Fund, European Central Bank, and the solvent members of the EU. The problem for Greece and reason for an impending Greek bankruptcy is that the recent agreed to debt bailout of $171 billion is being paid in installments and the next installment of roughly $30 billion is due next month. The payments are contingent on Greece following through with its promises to institute austerity measures. It is a certainty that while voters in Greece don’t want the pain of tough austerity measures that voters in Germany will throw out Chancellor Merkel if Germany continues to agree to bail out a Greece that does not abide by its promises to participate in Euro Zone fiscal austerity.
A Run on the Bank and on the Euro
A large portion of debt owed by Greece is owed to its own banks. While voters in Greece may have voted for a political situation that gives us an impending Greek bankruptcy those with bank deposits in Euros in Greece will likely head over to their local bank and withdraw their Euro funds. When everyone does this it is a run on the bank and when Greek and foreign depositors finish their run on Greek banks those with money in banks in Spain, Portugal, Ireland, Italy, France, and other countries may well do the same. After all, if the Euro will be a stronger currency than that of any departing country such as Spain, Portugal, Ireland, or Italy why not put Euros under your mattress? Better yet why not trade those Euros for dollars and buy short term US treasuries? Thus, while the Forex response to Greek bailout success was a rise in the Euro impending Greek bankruptcy is sending it down. The opportunity here for the Forex trader is that the next weeks and months will probably see a volatile Euro and volatile Forex markets in general.