What is the Grexit?
The withdrawal from the eurozone monetary union by Greece or a Greek euro exit is called Grexit.
What is the effect of a Grexit? How does it affect stocks, bonds and currencies?
When a country leaves a monetary union, that is seen as negative for the monetary union at least in the short term which affects the currency of the monetary union.
Businesses in the country which exits the union might see their share prices affected:
- Companies which depend on importing goods from other countries usually suffer as they need to continue buying goods from other countries although this becomes more expensive after an exit of their country from the monetary union.
- Exporters in the country that leaves the union on the other hand, can benefit from the situation as it is suddenly cheaper for their clients in other countries to buy their goods.
If you find this hard to understand, this lesson and video will help you:
At the same time any significant change like this increases general uncertainty in financial markets and can lead to capital fleeing to so-called safe havens, i.e. countries or assets that are seen as crisis-resistant.
Other countries that are seen as potentially having similar troubles as Greece could see the yields of theirrise, because the risk of a country leaving a monetary zone and defaulting had been seen as relatively low and a Grexit makes that risk appear higher. Lenders then demand higher returns on their loans to other troubled countries to compensate for the higher risk.
Last but not least, bank closures and capital controls that are installed to prevent people from withdrawing their money in a so-called bank run can harm general trust in fiat currencies and help crypto-currencies gain traction.
What does a Grexit mean for traders?
An action such as the Grexit could:
- weaken the currency of the monetary union, in this case the euro;
- increase the yields of bonds of countries that may be seen as the next riskiest countries, in this case Spain, Portugal, Italy and Ireland;
- drive up the price of the bonds of safer countries such as Germany or the U.S., the price of gold and the Swiss Frank (CHF) (safe havens)
- reduce the price of Greek stocks
- drive up the price of crypto-currencies such as (distrust in fiat currencies)
Learn more about the impact of politics on stock prices:
What can people do to protect themselves from negative consequences?
People with savings, stocks or real estate investments in euros would see the value of these reduced relative to other currencies.
The assets of Greek citizens might suddenly be priced in a new currency with much lower value such as the Greek Drachma.
To reduce the impact of this, they could open a so-calledon the euro, for example by opening a short position on EUR/USD. If the value of the euro goes down as an effect of a Grexit, the trade would yield a profit that can ease the pain of the reduced value of their savings and investments.
Alternatively, or in addition, investments in gold or crypto-currencies could see their values increase as well as short-term investments into bonds of countries which are perceived as safer.
Some might also think that going short on Greek stocks or the Greek stock market index could be a good idea in this situation. However, this can be difficult, very risky and nerve-wrecking in such tumultuous and illiquid times.
Experts might also simply bet on increasingand benefit regardless of the direction of price changes.
As with all financial trading activities there are risks associated with this and it is recommended tobefore doing this.
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