Monday, February 16, 2015

EURGRD The FX Pair Everyone Should be Talking About

As I write the powers that be in Brussels debate Europe's future and how Greece plays a role in it. There has never been a question in our mind as to whether or not Greece will leave the EU, it has always been a matter of when. Will that be today? We'll soon see. Either way its time for markets to start thinking about the implications on FX rates and specifically the soon to be reintroduced EURGRD rate.

On February 28, 2002 Greek Drachmas stopped trading in Greece and Euros took their place. The exchange rate at the time was EURGRD 340.750.

Depending on how they default on their debt obligations a rough guess would be the exchange rate reopens north of EURGRD 500.000. That number may seem a little scary and represents a large devaluation from when Greece entered the EU. An exchange rate of EURGRD 500.000 is less concerning than where it might be 30 days or 6 months from there. Will we see hyperinflation in Greece?

Hyperinflation in Drachmas is not new to Greece. Jim Grant does an excellent job sharing the history of Greek hyperinflation in his most recent article The Greek Monetary Back-Story. The history also helps to explain the understandably tense relationship between Greeks and Germans.

Greece's current finance minister Yanis Varoufakis is a fascinating character currently found at the heart of Greece's negotiations with the Troika. Considered an expert in game theory many believe Varoufakis to have a clever plan for leveraging Europe's desire to keep the EU and it's currency the Euro from falling apart, in favor of  Greece. After watching and reading interviews with Varoufakis we think that his approach is pretty direct and clear, even rational in many regards. Varoufakis knows Greece is drowning in debt and he is right to suggest that adding more will not solve the problem. Prime Minister Alexis Tsipras wrote a letter to the German tax payers saying exactly the same thing.

What doesn't square for us however is both Varoufakis and Tsipras's desire to implement socialist policies highly in favor of labor groups and their unions. This does not bode well for an economy that needs to foster mutual exchange and innovation. The end result in our opinion is further devaluation of Drachmas and a HUGE default on pension obligations. Labor unions, government employees and seniors will suffer the most which is tragic considering that they were the voters that brought Syriza to power.

For anyone wanting to take a deep dive into the problems that are currently impacting Greece and the EU I highly recommend Philipp Bagus's book The Tragedy of the Euro. The book is an enjoyable read and will clarify for any reader the exact reasons that the Euro will not stay intact.

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