Just as Mario Draghi was gaining traction with his latest plan to crush - but not too much so as to rekindle redenomination risk 0 the Euro "whatever it takes" courtesy of the recent launch of QE which sent the EURUSD to the lowest level in over a decade, something happened: Greece. And the problem for Draghi is that suddenly a loud, if confused, permabullish chorus has emerged screaming that a Grexit would actually be very bullish for the Euro. Of course, that's a problem as it goes directly in the opposite direction with what Draghi is trying to achieve, in order to not only send the DAX to all time highs (a DAX which curiously was downgraded earlier today by JPM) but to promote German, and to a lesser extent, French exports. However, if the EUR were to revert fully to a regime where a Grexit is seen as an existential threat to the EUR, that too is unadvisable, as it would lead to an avalanche of selling across not only FX but all asset classes.
Enter the proposal for a "controlled descent", first suggest today by Morgan Stanley FX strategy team.
Here is Morgan Stanley playing "good cop, bad cop" in setting the stage for Europe.
Greece exit risks rise: The credit impulse in European economies looks positive and leading indicators are looking better, but there are two risks: Greece and the Russia-Ukraine conflict. Both event risks have the potential to weaken the economic outlook.
Actually it depends on your definition of "risk" - after all the ECB would not have been able to launch QE had it not been for the Russian sanctions, and the tumble in European economic growth that resulted. We wonder: did Mario Draghi, and the entire Goldman central bank alumni team, remember to send Putin a nice thank you note for enabling Q€?
So back to next steps, and why - at least for Morgan Stanley - a Grexit is precisely the thing that German, French and other exporters ordered.
The Greek Prime Minister has reaffirmed his government’s rejection of the country’s international bailout programme two days before an emergency meeting with the euro area’s finance ministers on Wednesday. His declaration suggested increasing minimum wages, restoring the income tax-free threshold and halting infrastructure privatisations. Should Greece stay firm on its current anti-bailout course and with the ECB not accepting Greek T-bills as collateral, the position of ex-Fed Chairman Greenspan will gain increasing credibility. He forecast the eurozone to break as private investors will withdraw from providing short-term funding to Greece. Greece leaving the currency union would convert the union into a club of fixed exchange rates, a type of ERM III, leading to further fragmentation. Greek Fin Min Varoufakis said the euro will collapse if Greece exits, calling Italian debt unsustainable. Markets may gain the impression that Greece may not opt for a compromise, instead opting for an all or nothing approach when negotiating on Wednesday. It seems the risk premium of Greece leaving EMU is rising. Our scenario analysis suggests a Greek exit taking EURUSD down to 0.90.
So who will prevail: those who say a Grexit is bullish for the Euro as it removes tail risk and makes the Eurozone even stronger, or those who say a Grexit will lead to a plunge (controlled of course) in the Euro as the contagion risk never really went away, and now everyone will look to Italy and France, where anti-Europe movements have continued to rise from strength to strength, but nowhere more so than in Spain, where the Syriza peer, Podemos, is now tracking at top spot in polls: