As the conflict between Greece and its creditors escalates, the $5.3 trillion-a-day currency market suggests little angst about repercussions for the euro.
Options prices show traders are the least concerned in six years about the euro’s swings in the longer run relative to the short term. That’s a reversal of the norm — because there’s usually more uncertainty about what will happen further into the future — and signals traders see markets calming whatever the outcome for Greece.
Part of the optimism stems from forecasts for a rebound in growth as the European Central Bank’s unprecedented stimulus program supports exporters and increases inflation. And while Morgan Stanley warned a Greek exit from the currency union may send the euro plunging to a 13-year low, some traders are coming around to former Federal Reserve Chairman Alan Greenspan’s conclusion that “parting is the best strategy.”
“Over the long term, it’s probably not a big event for the global economy,” said Michael Collins, senior investment officer at Prudential Financial Inc.’s fixed-income division in Newark, New Jersey, which manages $534 billion. “If Greece exits, it probably gives the euro a bounce, certainly in the near-term, because you could argue that Greece and some of the peripheral countries continue to keep the euro weaker.”
Collins puts the likelihood of a Greek departure at about 50 percent, “a real coin toss,” he said by phone Feb. 9.
Investors are more sanguine about that uncertainty than in 2012, when Greece last flirted with leaving the euro. Then, Greece was a domino, seen leading weaker economies out of the union. Now, flickers of growth suggest member nations and the euro can withstand such a shock.
Analysts predict the region’s economy will expand at a 1.5 percent rate in the fourth quarter, up from 0.7 percent in the three months through March.
European stocks are near a seven-year high, with the Stoxx Europe 600 index adding 1.7 percent last week. Italy, whose debt outweighs its gross domestic product, pays less than the U.S. Treasury for 10-year debt.
“There could certainly be a few fireworks along the road,” said Jonathan Webb, head of foreign-exchange strategy at a unit of Jefferies International Ltd. in London.
“However, if you look through that, you may well find that there is a pick-up in euro-zone growth later in the year. People may be too pessimistic on the economic environment, which will lead to calmer markets.”
For the past seven weeks, a measure of the euro’s expected price swings has indicated the currency will be less volatile one year out than in the next month. That’s the longest stretch of that inverted relationship since 2009.
The risk of contagion is lower than the last time Greece went to the brink because peripheral economies have strengthened their funding positions in the interim, Deutsche Bank AG analysts led by Francis Yared wrote in a report Feb. 6.
Jefferies’s Webb said he expects Greece to reach an agreement with its creditors, although there is “definitely room for an accidental exit,” in an e-mail Feb. 10. There’s a 24 percent likelihood that a euro-area country will leave the shared currency within the next year, the highest since April 2013 and from as low as 7.6 percent last July, according to a Sentix gauge.
Greek Prime Minister Alexis Tsipras is treading a fine line between making good on campaign promises to dial back austerity, and avoiding default. Plans to increase the minimum wage would, for example, breach the terms of the bailout.
Finance ministers gather for an emergency meeting Wednesday in Brussels as Greece seeks further financing to avoid a cash crunch at the end of February.
“It’s just a matter of time before everyone recognizes that parting is the best strategy,” Greenspan said Feb. 8. No one wants to risk lending money to Greece, and Europe should stick to its bailout terms, he said.
Morgan Stanley sees the euro falling as much as 20 percent to 90 U.S. cents, a level not seen since 2002, in the event of an exit.
While the currency would slide in the short term, it may ultimately emerge stronger from any departure, Neil Jones, head of hedge-fund sales at Mizuho Bank Ltd. in London, said Feb. 10. Jones said he puts the chance of a Greek exit at “better than 50 percent.”
The euro has strengthened 0.9 percent against the dollar since Greece’s Jan. 25 elections, to trade at $1.1308 at 8:03 a.m. in New York. The median forecast of more than 40 analysts surveyed by Bloomberg News is for it to weaken to $1.10 by Dec. 31 before strengthening to $1.11 by the end of 2016.
“The euro zone’s considerably more healthy than when you go back a few years — things are different,” Mizuho’s Jones said. If Greece does exit, “once people have regrouped, reassessed and re-evaluated what’s left in the euro zone, I think it will become a more attractive currency.”