Euro currency set to take a big fall in the next six weeks as Greece exit gains momentum

The failing euro currency is set to take a big fall in the next six weeks as talk surrounding a Greece exit from the shared currency gains momentum, with European politicians, bankers and even comments from the World Bank add to pressure on the Greek’s to bring back the drachma.

Economists have also warned that the Greek financial system could crumble within weeks or days unless the ECB (European Central Bank) steps up support.

Greece’s President Karolos Papoulias told party leaders that banks had lost €700m in withdrawals on Monday alone as citizens rush to pre-empt capital controls and a much-feared return to the Greek drachma.

He cited central bank warnings that “great fear” might soon escalate to panic. The leaked details lend credence to claims that capital flight by both savers and firms have reached €4bn a week since the triumph of anti-bailout parties in May this year.

Run on Greek Deposits

Greek banks have lost 30 percent of their deposits since late 2009. The total fell to 171 billion euros in March. “The surprise is that there is still so much left. I can’t believe it will stay much longer.” said Simon Ward from Henderson Global Investors.

Greeks have withdrawn hundreds over a billion euros from banks in recent days as the fears grow that the country might be forced out of the euro zone, although there has been no sign of a run on Athens bank branches.

Not a Matter for the ECB?

ECB President Mario Draghi said that under the EU treaty, it wasn’t his job to decide what happened to Greece.

“I want to state that our strong preference is that Greece will continue to stay in the euro zone. Since the treaty does not foresee anything on an exit, this is not a matter for the ECB to decide.”

Meanwhile, the European Central Bank has stopped offering liquidity to some Greek banks it does not consider solvent, and international concern about the euro zone rose as Athens called new elections that look set to be won by parties opposing austerity measures.

Risk of Contagion

The risk of the contagion spreading from Greece to bigger European economies that are vulnerable due to high debt or weak banks has sent stock markets and commodity prices tumbling, and driven Europe’s single currency towards its lowest levels this year.

“The core question will be not Greece, but Spain and Italy.” World Bank President Robert Zoellick said on Wednesday.

Political colouring of Europe’s leaders is rapidly changing. Ms Merkel has just suffered what she described as a “bitter and painful defeat” in an important state election. Her Social Democratic opponent argued that absolute austerity was wrong.

Then on Tuesday, the new French president, François Hollande, turned up in Berlin to meet the German Chancellor saying much the same thing. And in the Netherlands, traditionally a defender of financial rectitude, the tide is turning. Dutch voters, shortly to go to the polls, are becoming disenchanted with austerity.

Big Fall for the Euro Ahead?

As far as Greece is concerned, the majority of Greeks want to remain a country that uses the euro as their currency, however most are also opposed to the severe austerity measures being forced on them.

There is no real possibility that Greece can have it both ways, therefore one has to go and our prediction, along with many others is that a new government of Greece will have to return the country back to the drachma. This will have a big effect on how financial institutions view the stability of the euro currency and with that in mind, a realistic fall of up to 30 percent should not be ruled out. The only question remains is how fast can the euro fall from here.

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Euro currency set to take a big fall in the next six weeks as Greece exit gains momentum