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Summary

With the array of ‘clever’ Greek themed headlines, it would be tempting to start with one of our own like ‘Greece is the Word’ but readers of financial journalism have become saturated by the Greek tragedy which is more of a sideshow to other market developments – unless you’re Greek of course!

With the array of ‘clever’ Greek themed headlines, it would be tempting to start with one of our own like ‘Greece is the Word’ but readers of financial journalism have become saturated by the Greek tragedy which is more of a sideshow to other market developments – unless you’re Greek of course!
We know that the losers in a Greek exit would be the Greeks and that Europe wants to keep them in; all they have to do is capitulate on reform as we’ve said here before.  But all of this conjecture is helping something that has already been a key part of Europe’s plan since the start of 2015 and why the European Central Bank (ECB) was so keen on quantitative easing (QE) even as the European economy recovered.  At the core of QE was the desire to weaken the Euro and further help the Eurozone economic pick-up.  More currency in circulation equals a weaker currency.
Rising Sun, Falling Yen
Following on from Japan’s successful weakening of the Yen to ignite the sparks of Japan’s economic re-emergence, Europe has followed suit.  While this has helped Europe and Japan, it is providing headwinds for the US economy as the US Dollar strengthens.  China, also much in the news, is set on a path to internationalise the Renminbi.
Sovereign Balance Sheets
One only has to look at the current account position of twenty leading economies to get some idea of what might happen in the future.  These adjustments can take a while to occur but inevitably they do.  By the way, the UK’s external accounts don’t look too rosy either with a current account deficit of 5.5% of gross domestic product (GDP).
In the accompanying table, Germany and the UK are at their extremes historically going back to 1980 with Germany’s current account surplus the largest as a percentage of GDP with the exception of the Netherlands, another beneficiary of Euro weakness.  Other Euro beneficiaries on the table with current account surpluses are Italy and Spain.  France is improving but still in negative territory.
Running large current account deficits requires the patience of overseas investors and/or attractiveness of domestic opportunities sometimes through relatively high short term interest rates.  The UK currently benefits from inflows due to its improving economic picture and dilution of political risk post the general election.  However, when overseas investors’ patience wears thin, the currencies of those with large current account deficits take a hit as we saw with India, Indonesia, Turkey and Brazil in recent times.  The resultant lower level of those currencies tends to mend in part, the current account balance.
Swiss Rollover
Of course, adopting a weaker Euro policy helped the ECB stave off the prospect of deflation which at the beginning of this year was deemed to be a real threat.  It also caused the Swiss National Bank to revalue the Swiss Franc and in the process nearly halve its current account surplus.
The Long and Short of it
With many long US Dollar/short Euro positions out there based on Greek worries, it’s not difficult to paint a picture where the Euro does better than the consensus believes – not only against the US currency but also sterling.  Whether that’s in the short term or over a longer period, who knows but mean reversion does tend to happen eventually.
In Conclusion
As I finish this blog, a deal to keep Greece in the Euro may have been reached and one that requires the necessary economic reform in Greece.  Whether it gets ratified by all parties in Athens and Berlin remains to be seen but at just 2% of Eurozone GDP it won’t have much impact on the European economic recovery wind assisted by the interlinked forces of a weak Euro and ongoing QE.  Financial contagion wasn’t an issue thanks to the ECB’s firewall of liquidity and political and sentiment contagion may well revert to the back burner.
Sadly the Euro may not be weak enough for the Greeks as they stay in the Euro currency which prompts another Greek phrase – they may have to GR-IN and bear it!
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