Pedestrians look at a mural, partially seen, with hands squeezing a bleeding Euro sign in Athens, on Saturday, June 27, 2015. Greece's place in the euro currency bloc looked increasingly shaky on Saturday after eurozone nations rejected a month-long extension to its bailout program and the prime minister called for a risky popular vote on the country's financial future.Petros Giannakouris/The Associated Press
Three years after Mario Draghi pledged to do whatever it took to save the euro, the breakdown in the Greek rescue talks is calling into question the integrity of the entire currency union.
While Greece accounts for less than 2 per cent of the euro zone's output, its exit would hurl the bloc into unknown territory by setting a precedent for other countries to reconsider their membership.
Greek Prime Minister Alexis Tsipras upped the ante just before the weekend by refusing to accept creditors' conditions for extending aid beyond June 30 and instead calling a referendum on the proposals. The crisis threatens to undo much of the work that Mr. Draghi, president of the European Central Bank, has done to shore up confidence in the euro as a leading currency of global trade.
"It's hard to believe it, but the Greek referendum has called time on Mario Draghi's 'whatever it takes' promise," said Lena Komileva, founder and chief economist of London-based research company G Plus Economics Ltd. "Markets need to brace themselves for the growing likelihood that the Greek standoff will go past the wire and the euro will come out broken on the other side."
Staying In?
Tuesday marks the expiry of Greece's current bailout package as well as the deadline for a payment to the International Monetary Fund.
While there's no rule to say Greece would have to leave the euro if it skips that payment or fails to extend its financing arrangements, it may prove difficult to stay in if, for example, the country has to start printing its own currency to keep its financial system afloat. Greece ordered its banks to shut Monday after the ECB froze the level of emergency aid available to the country's lenders.
On the other hand, there's still time for a resolution to be found, and both Greece and the leaders of the European Union have insisted they want to keep the country a member of the euro club.
'Political Will'
"The political argument is very much in favour of keeping the project together and keeping all-comers within," said Neil Jones, head of hedge-fund sales at Mizuho Bank Ltd. in London.
Yet patience is wearing thin on all sides. Euro-zone finance chiefs have turned down Mr. Tsipras's request to extend Greece's aid program to allow the July 5 referendum to take place, and are instead making preparations to contain the fallout from a so-called Grexit.
Even before the events of this weekend, German Finance Minister Wolfgang Schaeuble warned Friday of the harm an ineffective resolution to the crisis may do to the euro.
There's the risk of losing "confidence in markets, in the euro, the monetary union," he said at an event in Frankfurt. "This can be dramatic. We destroy the monetary union."
Euro's History
Since its inception in 1999, the euro has climbed as high as $1.6038 (U.S.) in mid-2008 and fallen as low as 82.3 U.S. cents in late 2000. It ended last week at $1.1167 after its first weekly decline since May.
The euro has survived trials before. It dropped almost 10 per cent against the dollar in October, 2008, as the collapse of Lehman Brothers Holdings Inc. sent shockwaves through global markets, only to recover those losses by the end of the year.
The single currency has proved remarkably resilient, too, amid the ebb and flow of the Greek bailout talks, climbing 2.6 per cent against its Group-of-10 peers since the end of March. It's on course for its best quarter versus a basket of those currencies since 2013.
Canceling Hedges
Strategists give a variety of reasons for its strength, from money managers canceling euro hedges as they dump bonds and stocks to optimism Greece will pull through. That optimism may soon be shown to have been misplaced.
"If Greece leaves the euro, or even just defaults, then the uncertainty around the euro increases," said Marshall Gittler, head of global currency strategy at IronFX Financial Services Ltd. in Limassol, Cyprus. "A solution to Greece would be bad for the currency, default would be worse and Grexit would be terrible."