Greece And EUR/USD: Solving Problems Nobody Knew About Is Better Than Not Having Problems

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Includes: ERO
by: Mateusz Polak
Summary

Greece cannot or does not want to repay the June IMF credit installments.

IMF already yielded to give Greece time until end of June, will probably yield further.

EUR/USD movements suggest that the markets are happier with Greece solving their problems than not having the problems in the first place.

For several months now, the Euro (OTC:ERO) has been under pressure from two distinct sides. One is speculation on Fed increasing the base rate, hence making dollar-denominated bonds more attractive (a promise repeated over and over again, yet not leading anywhere yet). The second one is the Greek Tragedy. Or Grexit. Or bankruptcy of a Eurozone member (for the second or third time now). Or any other possible consequence of what Greece has been doing for years to become so flooded in debt that they need the EBC, the EMF and constant debt reduction in order to just barely keep afloat. You hear about Greece so much in the news (especially market-related news) that it really becomes boring - pretty much any bearish move in EUR/USD is explainable by 'Greece something'.

Last week (on May 24, to be exact), the Greeks decided to play chicken with their creditors, particularly the IMF, when the Minister of Finance announced that Greece does not have the money (around $1.8 billion) to pay the June installments of the IMF debt. The comment was immediately countered by the Greek government promising to 'try and pay it anyway' - provided that the creditors agree to give even more ground, pretty much letting Greece pay their debt whenever and however they want. The IMF already yielded, agreeing that Greece can pay the whole 1.6 billion Euros by the end of the month, rather than in the four installments, which does not really solve anything.

One can only expect that the creditors will further ease their conditions. Why is that? Because Greece has a ridiculously strong position for negotiations. First, they have very little to lose, as they are already bankrupt, and have been for several years. The Greek citizens are again standing in long lines to withdraw their money from banks. On top of that, Tsipras has the people's mandate to fight the austerity programs enforced by the IMF and EBC, as that is why Tsipras's government was elected in the first place. On the other hand, the EU has every reason to yield to Greece's conditions.

There is a wave of renewed nationalism going through Europe, the most vivid example being Britain's plans to possibly exit the EU altogether (there is supposed to be a vote on just that in the near future). The more economically troubled countries (PIIGS, basically) will look up to Greece as an example of what happens if one exits the Eurozone. If Greece exits and survives 'acceptable' turmoil, other countries may follow, meaning the end to the Eurozone as we know it. Obviously, Greece's default would mean that they would not pay the IMF, EBC or any other debts, so any deal that gives the hope of getting some money back will please the creditors. Tsipras seems to be aware of that, and uses it to Greece's advantage.

The inconvenient truth is that Greece is already bankrupt, everybody is just pretending that it is not the case.

The fascinating thing about last week's turmoil is the markets' reaction to news. Yesterday (2015-06-02), we saw the strongest gains in EUR/USD since mid-March, a whopping +2.3 cents (from 1.092 to 1.115), bringing the Euro above the 2015 inflation-corrected mean (green line), 100-day moving average (blue line) and just 3 cents below the highest levels since February. All that due to an unspecific promise that Greece may get a deal with the IMF and not go bankrupt. In fact, the EUR/USD levels are higher now than they were on May 24, when they hovered around 1.10 following the news that Greece has no money to pay its debts. It seems that markets are happy Greece has a new problem and tries to solve it, rather than not having the problem at all.

EURUSD 2015 Daily

There may be an actual reason why the reaction to Greece's problems is positive: everyone is simply fed up with Greece. Therefore, any solution (except Grexit) would remove a lot of uncertainty, and ultimately lead to the Euro regaining some strength. The EBC and IMF yielding and giving up some (or all) of Greece's debts would mean Greece getting closer to repaying whatever debt is left, and finally ceasing to be the central problem of the Eurozone. Greece has been the focus since the 2008 crisis, and by this point solving the problem is wanted whatever the cost.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.