How the Greek Drama Affects Forex Trading

One of the most talked about situations in the Forex world at the moment is the Greek debt crisis. This is because while Greece itself isn’t a large part of European GDP, in fact it is only roughly 3%, the debt could cause massive losses for banks around the world, and more specifically – in the richer European nations.

It should be noted that a lot of the Greek debt that is currently being worrisome for traders is owned by French and German banks. The amount of debt that these banks carry is unknown, but it is known to be massive and very significant. Because of this, the Germans and French are highly exposed to the endgame of the debt crisis and could cause significant losses for those banks. As those banks go, it could have massive repercussions in the countries they are rooted in.

Is Debt Contagious?

The concern of this “contagion” is that few people actually understand where it all ends. The other issue is that if Greece gets a break on the terms of its debt, there is nothing to keep the Irish and Portuguese to ask for the same. The creditors may find that they are forced to “take a haircut”, or take less payment than originally expected – crushing profits for investors. With massive losses piling up in the banks, you could see credit markets seize up in the more prosperous countries of Europe, and this could cause serious damage to the euro as a whole.
The situation in Greece has turned out to be one that almost guarantees a cutting of the Greek debt as they simply cannot pay it off. In fact, the 2 year Greek bonds recently sold for a 26% interest rate – which certainly couldn’t be paid in reality. Because of this, people will feel a bit weary of investing in Europe. This will cut a certain amount of demand for the euro.

One thing that markets hate is uncertainty. The Greek situation pretty much guarantees that there will be a certain amount of it surrounding the European area. Because of this, we may see the euro weaken towards the latter part of the year as investors flee from the continent and look to safer areas to get involved with, such as the United States.   
By: Christopher Lewis