This year has seen some pretty remarkable events in the global economy, and perhaps none so remarkable as Greece nearly exiting the Eurozone. After a 3 week closure of all banks in Greece, the arrival of emergency funding in July enabled the country to have their banks reopen.
Greece has narrowly avoided a Grexit this time around by negotiating another bail out, which is working as a short term solution. The immediate threat of a Grexit has gone, but for how long? The risk is still hovering just under the surface, and is likely to rear up again if Greece cannot successfully negotiate a way out.
Why was the threat of a Grexit so significant?
As Greece would be the first country to exit the Eurozone, there has been no solid procedure for such a departure, leaving the world in the dark about what to expect. We would assume that if Greece left the Eurozone, it would most likely revert to using their previous form of currency, the drachma. If this did occur, there is the risk of hyper-inflation as the drachma is valued lower than the euro.
What does this mean for the global stock market?
The global stock market has plunged; the U.S has fallen more than 2%, and China more than 5%, as a result of their strong investments in Greece’s infrastructure. There is a great deal of uncertainty about what will happen next, making it a very tense time for the global markets.
The turbulent financial status of Greece has put a strain on the potential of future investors, not only to Greece but other European countries such as Spain and Italy, with people holding onto their money tighter than ever. The weight of this stress results in business expansions subsiding, and imports from surrounding countries are dramatically slowing down. However, because Greece makes up less than 2% of the Eurozone’s GDP, this won’t be overly detrimental to the surrounding countries.
Interest costs are climbing as investors are losing confidence in the euro, and now that Greece has planted the seed of dropping the currency, it begs the question: who next? Investors are being deterred by the risk of contagion and the fear that Greece is just the first domino in a series of falls.
There is no way to foresee Greece’s future; the global market will need to wait and see, and respond accordingly.
