Is it possible to prepare for a Grexit ?

The problem of Greece appears to be rearing its head again, and analysts are starting to question whether markets are failing to price in a possible Greek exit. Tidjane Thiam the newly appointed Chief Executive of Credit Swiss weighed in on the debate saying he believes that risk assets are under-pricing the possibility of a Grexit, as it is now known.  The reason may be that markets are unsure exactly what risks they should be anticipating. The financial system has largely prepared itself for the possibility of a Grexit, by reducing its exposure to the region, and Greece on its own is a relatively small economy compared against the eurozone. Therefore addressing it from a logical angle one could argue that investors are right to largely ignore the consequences of a Grexit.       

What will the consequences be of a Grexit? The fact is no one knows, but plenty speculate. Some feel the above, very little impact; others fear a Grexit would ultimately lead to the break up the euro and the dismantling of the euro area. Exactly what Germany fears. How does one prepare for such a range of outcomes?  One feels that this is a harder question to answer. There does seem to be a real risk that if Greece was to reintroduce the drachma, the euro dream may well end as the euro may no longer be considered a true monetary union if participants could come and go at will, but rather a fixed exchange rate mechanism.

The euro is not a European problem it is a global one. If one felt there was a distinct possibility that Greece leaving the euro would break up the European union, divesting European assets may not be enough; the UK for example relies on Europe for approximately 50% of its exports. Europe holds a large amount of US debt, second only to China, an increase in eurozone issues could have implications for the US financial system, how to you prepare for that?

If one takes the Armageddon view one should not invest in anything as neither bonds nor equities would provide a safe haven. If you liquidate to cash that also has its risks, the euro might hold together, in which case you will face the cost of lost opportunity.

There are always plenty of risks that can destabilise the global markets and it is impossible to prepare for all of them. What usually hits asset prices is not the perceived risks but generally those risks that come from left field that no one anticipated. Ultimately capital needs to be invested. Risks are always there and one cannot completely discount the possibility of a Greek exit but trying to anticipate its implications may be as risky as trusting to the belief that the continuation of the global economy is not just down to whether Greece does or does not remain within the euro. No one appears to have asked Mr Thaim what exactly he believes one should be doing  to prepare for an event that might not happen, or what he sees as the correct discount for a consequence of an event that no one really knows the outcome. 

Posted on March 10, 2015 .