The impact of the Greek crisis on the euro, eurozone, and the global markets

Abstract

The goal of this project is to examine the impact of the Greek debt crisis on the Euro currency, the Euro zone, and the world markets. I am interested in showing how a small economy like the Greek economy can have a huge impact on the most traded international currency in the world; the euro, on the economies of its peer Euro zone countries through three channels: Banks’ stock prices channel, Government bonds channel, and CDS market channel, and on the global markets in case of a Greek default or exit. Our findings suggest that Greece had a huge impact on the euro currency where the euro witnessed large fluctuations in its value as a result of news events and developments about the Greek crisis. Regarding the euro zone; contagion effects were detected in two channels: the government bonds channel and the CDS market channel where contagion was transmitted from Greece into the Euro zone economies through these channels in the form of declining government bonds’ prices and increasing CDS spreads. With respect to the banks’ stock prices channel; no contagion was transmitted, but only a response to a common shock in the form of declining banks’ stock prices as a result of news about a Greek bailout. Finally; based on my own analysis, a Greek default will have a huge impact on the European economy; and hence on the world markets, as the major holders of the Greek debt are European banks along with the ECB, in case of a default these banks will suffer losses on their balance sheets as this debt will be written off and this will result in a liquidity squeeze in the market along with bank runs and maybe bank bankruptcies. However; the literature review contradicts this analysis as the authors argue that a Greek default or exit will not have major ramifications on the global markets. Therefore; there is a debate over this topic, knowing that; there is more than one case scenario for the impact of the crisis on the global markets.