Grexit, the IMF and Merkel: 3 reasons to sell the EUR

The EUR's behavior these last two months,  has not been for the faint of heart, as the pair has been moving back and forth in an almost 700 pips range, with wide intraday ranges and spikes of extreme volatility. The faith on the pair rests in two troubled legs, a US FED's rate hike, and the possibility of a Grexit.

When it comes to the first, the tepid growth of the US during the Q1 have affected investor's hopes of a strong economic policy tightening for this 2015, although an uptick in inflation in May, and a shockingly positive US Nonfarm Payroll report, have lifted back at least part of those hopes. And while the FED's upcoming move has gathered most of the market attention since the year started, such attention has turned now to Europe, and a probable Greek debt default.

Grexit

The word "Grexit" appeared some years ago, when the country, along with other minor European economies, suffered severe economic woes, and needed to implement several economic reforms -also called, austerity measures- in order to get economic help, or bailouts, from the EU, the IMF and the ECB, better known as the Troika. And whilst most of those economies have been suffering, but improving, Greece has been always in the spotlight, always in the verge of a default, always ready to leave the Union. 

This story is pretty boring, since it has been making the rounds for at least three years. But something changed in between: 4 months ago, a well known anti-austerity party, Syriza, won the elections, and  took several steps to revert those austerity measures implemented a few years ago. In the meantime ,the bailout agreement ended, and the most the creditors could do, was extend the bailout until the end of June. With those new measures, Prime Minister Alexis Tsipras has broke the terms of the bailout, and these past four months, have been all about re-negotiating the conditions of the agreement.  Spikes of optimism over a fresh deal, were short lived, with enough jawboning and headlines to fill a book.

What changed, (yes! another!) is that Greece have already run out of money, and the IMF gave up on negotiating with the country.

The IMF

Greece was due to pay €300 million to the IMF on June 5th, the first out of a total amount due to the organism this month of  €1.6 billion. A day before, Greece announced a deal was almost done, and that they will delay the all of the maturities to the end of June. That was not that bad, until this Wednesday, when the IMF negotiating team left Brussels announcing they are still at square one on a debt deal. Gerry Rice, spokesman of the IMF said: "“The ball is very much in Greece’s court,” and that  “there are major differences between us in most key areas." All hell broke loose after that, and here we are, speculating again on the possibility of a Grexit. Is it possible? For many months, I believed that the EU and the ECB would do almost anything to keep the country in the region, to avoid the domino effect and the loss of confidence in the Union.  But that picture did not included the stubbornness of the current government, who is not willing to give up an inch and seems more willing to lose it all, than to reach a deal. Success depends largely on Tsipras making concessions. And he is not willing to make one. 

Angela Merkel

And if all the above was not enough, German Chancellor Angela Merkel, has chosen this Friday to down talk the EUR´s strength, by saying a strong currency is not helpful for the peripheral countries which have implemented economic reforms such as Spain and Portugal. Furthermore, the iron frau is said to be preparing  for  a Grexit, and to have put a team of economic experts and bankers to draw up an emergency plan to try to minimize the effects of a Greece default and exit from the EU, over the German economy. 

Both, Merkel and the French President Francois Hollande had spent countless hours speaking with Greek Prime Minister Alexis Tsipras, but seems that at this point, everyone is done with the lack of action. Either Greece lower its demands next week, or it will be left alone to face its fate.

There may be some ones that think that if Greece leaves, it would be finally a relief for the EU, and in fact could be, in the long run. But the immediate effect will be chaotic for Europe, with bank runs and huge losses for the countries that lent Greece money. Worse, the world will likely give its back to Europe, financial and commercially, and the EUR/USD can sink even below parity. Still, the month have eighteen days' left. Eighteen days more, for good or bad, to put an end to  the Greek drama.