Morgan Stanley Says Grexit Would Send EURUSD Crashing To 0.90

Tyler Durden's picture

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:

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saveandsound's picture

That would be fun, wouldn't it?

Exporting deflation worldwide...

philipat's picture

So that will make Draghi very happy. He doesn't even need QE..

NoDebt's picture

Hold on a second.  Germany likes having weaker nations in the EUR to keep it weak so they can run their export machine.  So if a weaker country LEAVES would that not have an UPWARD effect on the value of the EUR?

Longer term, of course.  The day it happens, if it happens (and I still have my doubts), there will be a slaughter.

He_Who Carried The Sun's picture

nonsense, the Euro would REJOICE !!

Keyser's picture

And then there is the rub, which is the 26 trillion in Euro derivatives exposure left dangling in the breeze...


Headbanger's picture


EURUSD has already crashed from 1.393 over the past year!


BobPaulson's picture

ECB doesn't know if euro should be strong or weak. I am not sure myself.

philipat's picture

ND, you know better than to suggest that logic and fundamentals actually count for anything? THe CB's and TBTF's call all the shots and manipulate every single "market" out there...

NoDebt's picture

You're right, of course.  I should know better by now.

BrosephStiglitz's picture

I agree, but even so, a Grexit sets precedence for others to exit.  It will be interesting of course. I fully expect the Euro to go into free-fall one of these days based on a complete lack of confidence in its structure.

The creditor nations can either embody the full measures required to run their federalized Europe, or they can lead the entire of Europe along a path to the cliff edge at gunpoint.  This current currency system is flawed and cannot survive in its present form either way.

It is quite terrifying that everyone except the European leadership can see the iceberg up ahead.  Otherwise there is some preordained end-game politically which requires the current status quo.  Either way, it is quite a worry.

wildbad's picture

the breaakdown to watch in this regard is:  just where exactly does germany export to?  traditionally intra-euroope exports were about 40% but that has obviously dwindled since 2008.  russia was a playah untill those handy sanctions and china's numbers aren't encouraging.  a strong dolloar could be just what we need over here.

noben's picture
noben (not verified) NoDebt Feb 9, 2015 12:44 PM

Nodebt: "Germany likes having weaker nations in the EUR to keep it weak so they can run their export machine."

Sorry, buddy... popular as this meme seems to be, I have to disagree: Made in Germany did just fine in the pre-EUR era of the DEM.

In the final analysis, "Quality goods & services are a sustainable export biz model." The paperware is just a means of keeping score. Same as it ever was.

When you think of "Quality, Precision, Dependability/Reliability, Organizational skills" in the EU zone, do you think of Germany or the PIIGS?

p.s. In the 70s-90s era before the EUR, Germany used the Branch-plant economic model for its exports: they'd get sub-assemblies made in places like Portugal, Canada and Singapore, and have the Final Assembly done at home, so they could benefit from the 'Made in Germany' prices and lower BOM cost and lower labor cost. Plus, importing the sub-assemblies exploited Import Duties that are still in place.
Germans are anything but dumb, lazy or disorganized, and they hate BS games, waste or inefficiency.

PowerPlayer's picture

I agree.  There are other forms of capital flow besides just giving money away.  Rather than Germans giving money away German Individuals could buy vacation homes outside of eurozone, German Companies could buy companies outside of Eurozone, and the German government could buy US treasury bonds like China.  All of these would be ways that Germany could keep the Deutsch Mark lower in value.  

I cringe everytime people say that Germany needs to give money away in order to keep their currency low in value.

giovanni_f's picture

"So that will make Draghi very happy. He doesn't even need QE.."

QE plays a different role. The Germans greenlighted QE when they found out what my neighbour's dog had known before: That the sanctions against Russia are suicidal for Germany.


williambanzai7's picture

For the financial parasites on Wall Street a weak Euro has many advantages. Think off all those cheap assets waiting to be levered up with buy out debt. A dollar rich bankster/private equity wet dream.

And with Draghis cheap QE debt the swarm of financial locusts is ready to descend on the poor unwitting souls who will lose all semblance of the comfortable European lives they once knew.

Remember who said it here.

post turtle saver's picture

you forgot to add, "muahahahaha"


SamAdams's picture

Yes, the whole of Euro Zone will receive the same privatization.  Euro debt will domino after Greece.  It should have a few years ago and now the spring is would tightly.   

Will eventually come home to the reserve currency and remove it from power.  More privatization and the solution of IMF SDR.  Whomever owns IMF will be quite happy...

brooklynlou's picture

And all those imaginary dollars the Fed invented will rush into Europe and buy out the place in the firesale.

Winston Smith 2009's picture

And the USD will grow even stronger during the crisis. Buy Europe, cheap... I'm sure the Fed wasn't even remotely smart enough to intend this, but there might be a happy ending after all... for the US.

Could the U.S. Become the Unrivaled Superpower Again?   (January 29, 2015)

giovanni_f's picture

"We can only hope." Yes and no. This is the correct sentence:

We can only hope that when - not if -  this happens a class of political leaders is at the helm that reverses the wealth distribution from the people to the banks that came along with the greatest credit bubble of mankind.

(The Euro and the Dollar are just two of many facets of the same ponzi scheme enacted to make the 1% take possession of what accidentally left to the 99% after the abolition of slavery)

noben's picture

Not a biggie, if you keep your Euros in a solvent German bank.

Worst case: EUR --> DEM. It'll be backed by more real stuff than the CHF, for example.

IOW... "So what?"

y3maxx's picture

...Ordering one souvlaki on a bun with special house grexit sauce.

post turtle saver's picture

which is fine, because the Euro should never have been worth more than the US dollar to begin with

noben's picture
noben (not verified) Anasteus Feb 9, 2015 12:54 PM

"Morgan Stanley Says Grexit Would Send EURUSD Crashing To 0.90" -ZH
"Or to 0.00" -Anasteus

How about... EUR --> NEUR (New/Northern Euro)? NEUR = EUR minus PIIGS.

The PIIGS have their own national currency, and thus reboot their economies on a branch-plant model plus national brand specialty goods and tourism.

Which is what it should have been all along.

GetZeeGold's picture



How would this affect Morgan Stanley again?

williambanzai7's picture

There was a time when the Euro was trading down around .85 and fundamentally speaking, perhaps there is no reason why it shouldn't be trading there now.

wallstreetaposteriori's picture

It's all relative the bullshit every other county does to devalue their currency. 

williambanzai7's picture

Europe seems to be trying the hardest at this moment.

giovanni_f's picture

For the US, a weak Euro has no advantage except easing the trade deficit. Weak euro most likely a concession of th US to Eurozone as compensation for the losses EU-countries suffer for supporting the war against Russia with suicidal sanctions.

BobPaulson's picture

I can't imagine them being that organized.

brushhog's picture

Yes, and the world didn't implode.

Dien Bien Poo's picture

But all this Dollar strength is not good for US exporters. Boeing for example, cannot compete with Airbus and a Euro that is now all of a sudden 30% cheaper! Can they? This is a Bad Moon Rising.

brushhog's picture

For a country with a trade imbalance this is good news, overall. We IMPORT much more than we export, so a strong dollar is a net gain to the US.

Dien Bien Poo's picture

tell that to all the exporters. 

tarsubil's picture

We're already making up the difference in printed money right? So more imports is "good" in the same way robbing a bank is "good" for you.

Sandmann's picture

Make those F-35s from Lockheed even worse value for money

brooklynlou's picture

Its kinda hard to deliver on those plane orders when you have manufacturing facilites in countries that may bail out of the Euro

Space Animatoltipap's picture

And the WW $ based pyramid ponzi scheme will receive a VERY heavy blow because of it all. Thanks to "Greece", the land where demoncrazy supposedly started. The irony of the whole situation is "quite" amusing. Hare Krishna.

Catalonia's picture

The moment the € trades at 0.9 we will not be talking about Grexit, we will be talking about Gerxit, Frexit...

Dien Bien Poo's picture

utter drivel. Do you work at Goldman Sachs?

j0nx's picture

Looks to me like Greece holds all the cards here regardless of what Germany thinks. Problem is that if Germany relents then all the other redheaded stepkids come begging at the door for their deal. Threatening the Greek leaders will do nothing either since if they don't stay the course that they were elected to steer then they will be tossed from power overnight and an even more radical government will take power. No-win situation for the Euro.

brushhog's picture

They win by kicking them out.

j0nx's picture

Yeah sure then the derivatives kick in, the other kids start leaving one by one and the Euro folds sending the entire line of dominos around the world toppling over. Sounds like a win to me...

Brazen Heist's picture

So Grexit could be exactly what Super Mario wants then. Afterall, QE was in a large part, about crushing the EUR...

Or maybe...QE was preparation for a Grexit, have all that money ready to absorb toxic writeoffs on German balance sheets in the event of a Grexit.


Bob's picture

It looked like it was meant as a two-fer to me. 

BrosephStiglitz's picture

QE was a backdoor bailout of the European banking system on the tax-payer's dime.  Same as it was in the US but for the US banks.  There are central bank papers out there which state as much (albeit in not so obvious terms). Why are we still talking about QE as if it is some kind of inflation causing genie?

The only way QE would EVER cause inflation is if it brought new loans into existence, and it probably indirectly does, for some.  However, there are two sides to every market. Supply, and DEMAND.

Seeing as how most households and businesses are trying to deleverage, or hoard cash, or buy assets (which store value because they expect the worst (see: PM's/stawx etc.)) it is impossible to expect QE to cause any kind of major inflation.  The demand side of the loan creation equation has kicked over the board after the events of the Financial Crisis, and have gone home. 

So yes, we have deflation for now.  And no we will not see inflation, even with QE.  And no deflation isn't necessarily terrible for PMs.  And yes the stock market is probably going to keep rising in the near term too.  Watch a bunch of people shit their pants and run from the market this year, watch their faces when the sovereign debt markets go thermonuclear.

International capital is bouncing around like a wrecking ball right now.  The Euro, the Yen, the US dollar, the Chinese Yuan, the Swiss Franc, even the Danish Kroner: all becoming victims of capital flows which can, and will, turn on a dime and head into whatever region of the markets that seems safe at a moment's notice.