As the Greek debt crisis reached its final hour yesterday and a default on the 1.6 billion Euro installment that Greece must make to the International Monetary Fund (IMF) to begin repayment of its 190 billion Euro debt became increasingly likely, large multinational financial institutions are beginning to cast their predictions on ensuing market conditions.
Goldman Sachs Group Inc (NYSE:GS) yesterday made a prediction that the Euro will fall in value, potentially reaching a point at which it is worth less than a US dollar.
“This week’s jump in the euro on news of the Greek referendum made no sense to us,” the bank’s analysts explained to CNBC. “We continue to see mounting tensions over Greece as a catalyst for the euro-dollar to go near parity, if contagion to other peripherals causes the European Central Bank (ECB) to accelerate quantitative easing.”
“In one year’s time, the euro will be fetching just 95 cents” – Goldman Sachs
Indeed, Greece did not make its payment to the IMF yesterday, making it the first advanced nation to ever default on a debt to the global financial stability agency. That followed months of contentious negotiations with its creditors over exchanging reforms for another bailout.
An exit from the Eurozone by Greece would leave the European Central Bank exposed to a debt of 190 billion Euros, over a third of its entire capitalization, and create a situation which could be problematic for other European nations including Spain which has 56% youth unemployment, and France, whose debt-to-GDP ratio is 250%, with nationalized enterprises relying on state support.
“After years of cliff-hangers, the market continues to expect a deal at the last minute, including in the aftermath of the referendum announcement. As a result, few are willing to put on euro downside, even as the odds of a deflationary shock to the Euro zone are rising,” Goldman Sachs commented.
Goldman Sachs concluded by stating that “We fail to see how mounting tensions around Greece do anything other than reinforce U.S. outperformance over the euro zone, i.e., we see this price action as a fade.”