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[SINGAPORE] For every one optimist on the euro, there are many more doubters ready to empty his half-full glass.
A contrarian view making its rounds in the market suggests that the euro could strengthen after belligerent Greece leaves the eurozone. But analysts BT spoke to do not back this view, warning that a Greek exit would create more mayhem for other debt-laden countries.
"Admittedly the eurozone would be stronger without Greece but it would not be long before market attention turned to Portugal and Ireland and even Spain as the next candidates for exit," said Crédit Agricole global FX strategy head Mitul Kotecha.
The euro has been sliding as Greece struggles to put a new government together. New elections will take place next month and with polls showing the anti-austerity Syriza party in the lead, the country is one step closer to losing its membership in the eurozone.
Worried investors sent the euro falling past the US$1.28 mark yesterday to US$1.2711 in the evening - close to its previous low of US$1.2663 in January. The common currency also hit a new 10-year trough of S$1.6131. It, however, recovered slightly in late trading.
A few analysts have countered that the eurozone and euro would be better off without Greece. "A Greek exit could be the trigger for a stronger and more stable euro, led by politicians and institutions with a clear interest in both its success and theirs," National Australia Bank strategy head Nick Parsons told The Guardian this week.
He believes that politicians will try to safeguard what's left of the eurozone. Germany, especially, cannot afford going back to the deutschmark as it is likely to strengthen, hurting the country's competitiveness.
But that view has not caught on with many others, who fear that Greece's departure from the eurozone would exacerbate market pressure on other weak members.
Standard Chartered Bank investment analyst Surendran Chelliah sees the euro continuing its fall if results from the next Greek election point to the country leaving. "Fears of contagion and elevated levels of stress in the euro area banking sector will likely dominate any benefits of a Greek exit on the euro."
When the eurozone debt crisis was at its worst last year, liquidity evaporated and the region's banks were forced to shrink their balance sheets to shore up capital. A Greek exit could revive severe market tensions.
The European Central Bank would be forced to ease policy via interest rate cuts and another round of longer-term refinancing operations to maintain financial system liquidity, all of which is euro-negative, said LGT Bank (Singapore) managing director Simon Grose-Hodge.
"Only in the much longer term could it be considered even remotely euro-positive, in that the detrimental effects on Greece may persuade other countries to pursue a closer monetary union," he added.
The latest simulation results from investment technology provider SunGard show the euro weakening across all its five exit scenarios. The US dollar could rise by 5 per cent against the euro if Greece exits, and surge by 25 per cent if Greece, Portugal, Ireland, Spain and Italy all leave.
"We don't believe (there is) a relief in sight," said SunGard research head Laurence Wormald. Banks may have become more prepared for a Greek exit but the scenarios beyond that are still shocking, he said.
For the euro to strengthen on a sustained basis, policymakers have to balance both deficit reduction and growth concerns. "The formation of a common eurobond, increased spending on investment projects to enhance productivity as well as reform of labour markets and mobility would help confidence," said Crédit Agricole's Mr Kotecha.
"However, this is a long way off and the euro is likely to suffer for some months to come as growth worries and peripheral country tensions persist. We continue to maintain our year end EUR/USD target at 1.26."
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