Market Overview

The Grexit And Why 'We're About To Witness The Return Of Drachma'

The Grexit And Why 'We're About To Witness The Return Of Drachma'

Investment advisory deVere Group has over 80,000 clients located in 100 countries around the globe. However, comments by International Investment Strategist Tom Elliott were laser focused on one investor issue: the economic fallout from a Greek debt default.

Elliot didn't pull any punches, saying, "We're moving into uncharted waters. We're about to witness the fragmentation of the single currency and witness the return of the drachma."

While that warning sounded dire, Elliot's drachma domino effect views were far less chilling, as he invoked T.S. Eliot's famous "…not with a bang but a whimper," to sum up his sentiments.

The Greek Global X Funds ETF (NYSE: GREK) is down more than 17 percent year-to-date.

A New Tool

"The ECB is able to limit contagion to other eurozone bond markets through its Open Market Transaction (OMT) policy, which helpfully was declared a legal tool of monetary policy by the European Court of Justice (ECJ) just this week," Elliot said. "This will substantially limit eurozone bond market volatility in the wake of a ‘Grexit' [Greek exit]."

Related Link: Greece Is Closer To 'The Abyss,' Warns Berenberg Chief Economist

Limited Contagion

He continued, "And with only 18 percent of the outstanding Greek government bond market in private hands, Greek default will not cause havoc with non-Greek banks, who have largely washed their hands of the stuff."

A Strange Twist

Elliot said that, "One oddity is that Greece may decide to honor privately-held debt but not the 72 percent held by IMF, ECB, eurozone governments and other creditors."

The strategist says this means that Greece could be forced out of the euro, while seeing the value of privately held Greek Government Bonds might appreciate if the government promises to honor that part of the debt.

While treating creditors of the same bonds differently raises legal problems, it will avoid Greece being labelled as ‘in default' by some of the credit agencies, such as Standard and Poor['s], who only look at the risk of default on privately-held debt in their calculations."

Greek Precedent Effect

Long term, Elliot thinks other "peripheral eurozone capital markets will be more risky due to the likelihood of interest rates rising relative to those of Germany."

"Market interest rates in Italy, Spain, Portugal and any other country that might run into a crisis in the future, will never be as low relative to those of Germany ever again if – or rather, when – Greece leaves the euro," he said.

Investor Takeaway

Long-term volatility in the capital markets will, "inevitably, present challenges but also standout opportunities for investors."

Notably, Elliot mentioned, "UK stocks are likely to be considerably cheaper in the wake of a Grexit."

He concluded, "Due to likely unprecedented circumstances, investors would be wise to review their portfolios in order to ensure their financial objectives remain on track, that they mitigate any avoidable risks, and that they take advantage of prevailing opportunities."


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