If Greeks elect a left-wing government on Sunday led by the Syriza party, or a left-leaning coalition government, expectations are the country will break the terms of its bailout funding and then be forced to leave the euro zone.
On June 11, Canadian Imperial Bank of Commerce polled 200 of its staff in the capital markets trading division about what they think will happen in Europe. These are the people that sell, trade and structure securities, out of offices in Canada, the U.S., London, Hong Kong and Tokyo.
The results found that 87 per cent believed that Greece would be the first country to exit the euro zone, and 90 per cent believed an exit would see the country default on some or all of its debt. More than half of respondents felt Greece would default on all of its debt and 50 per cent saw the country as moving to its own free floating currency in the break-away scenario.
A break up of the 17-nation currency union would reverberate in the global markets for at least six to 12 months, with investors adopting a renewed aversion to risk. The Canadian dollar and other commodity currencies would decline, while the U.S. dollar’s rise would be contained by additional monetary stimulus. Additionally, the euro could expect to bounce back in the first half of next year, if the euro zone became a more homogeneous group with greater political and fiscal integration, the survey said.
“Beyond the immediate market contagion, we do not see the risks to Eurozone unity as a domino sequence, but rather as a number of different countries struggling with their own problems of over-indebtedness. But the market acts sequentially and already reflects serious doubts about Portugal and Spain,” CIBC said.
On commodities, CIBC says that if the picture painted by its survey comes to pass:
“We believe that poor economic growth is adequately priced into major demand forecasts. More concerning is the negative impact that further deterioration of credit and financial liquidity would have on commodity derivatives pricing and the willingness of market participants to deploy capital to these assets.”