FX markets relatively unscathed by euro crisis, says Greenwich Associates

Analysis by US based Greenwich Associates into foreign exchange data from the past 13 years leads it to conclude that FX markets will survive any Greek exit from the euro relatively unscathed.

The investment consultant says that the liquidity apparent in the overall globall FX market is one reason why there is so little concern over the effects of any adjustment to eurozone membership.

That is not to say there would not be any effects. It is important to note the rapidity with which a Greek exit could occur, compared with the decade it took for governments and companies alike to prepare for the introduction of the euro.

Based on its analysis of 13 years of trading data included in its annual FX studies, Greenwich Associates says there are four key projections and conclusions to draw from the currency crisis.

1. Due to recent efforts by the EU, the ECB, national governments, companies, and investors – and to the longer-term evolution of FX into perhaps the world’s most liquid and resilient marketplace – a euro breakup is unlikely to materially disrupt the normal functioning of global foreign exchange trading.

2. The exit of Greece and/or one or more “periphery countries” from the euro zone would likely produce a temporary spike in trading volumes as markets react and adjust. Greenwich Associates estimates that volume spikes during the ensuing months after an announced Greek exit would inflate global foreign exchange trading volumes for the following year by approximately 7.5% and by roughly 5.5% in subsequent years.

3. Despite these increases, overall trading activity would likely normalize in relatively short order, leaving the market to revert to recent historic growth rates within a span of less than five years. It is important to remember that, although any split in the euro would represent a historic event that would create massive, temporary shifts in global FX trading, the drachma accounted for only 0.6% of pre-euro European FX volumes and 0.5% of global volumes.

4. Based on Greenwich Associates projections, a more extreme event involving a wider breakup of the euro zone would inflate global foreign exchange trading volumes by 25% in the ensuing year. Trading volumes in subsequent years would be affected by the moderating influences of potential decreases in market liquidity, a slow-down in global commerce and potential disruptions in global bond issuance.

Meanwhile, the consultant says, the efforts to inject liquidity into the European banking system, as well as the ongoing implementation of Basel III has had the effect of significantly reducing the main threat to functioning FX markets: widespread bank failures.

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