Europe: From Grexit to Brexit to Frexit? - HSBC

Research Team at HSBC, suggests that Europe’s political challenges are not new and indeed, it seems that since its creation, the single currency has seen frequent talk about its impending break-up.

Key Quotes

“In 2012, the sovereign debt crisis reached a peak, but the peripheral bond market took the strain of these underlying political issues, not the currency.”

“The ECB promised then to do “whatever it takes” to keep the Eurozone together in 2012, and announced government bond purchases in January 2015. This has limited bond market volatility and made the EUR itself more exposed to political risk. But this risk has largely been confined to the peripheral, smaller economies. In 2015, we saw a Greek referendum on a third bailout package fail, while Belgium and Spain have both seen political deadlock in the last year.”

“Politics is set to become a bigger driver of the EUR from here. On 4 December, Italy holds a constitutional reform referendum which is increasingly seen as a broader gauge of support for the European project. Opinion polls suggest that the reform will be voted down (Reuters 7 November) and this would be seen as negative for the EUR. Then, in 2017 the core economies of France and Germany go to the polls. The market is already starting to anticipate that, after the populist and anti-establishment wins in the UK and the US, Marine Le Pen may stand a realistic chance in the French presidential elections in April and May (Reuters 9 November). While the pendulum will ultimately swing back away from political risk in Europe to political risk elsewhere, we now factor in some near-term weakness for the EUR. We see  EUR-USD at 1.05 at the end of 2016, before rising again to 1.10 through the course of 2017.”