Time for a little conjecture: What would happen if Greece were to leave the EUR this week?

Of course I have no idea and can only guess, but I think we might see a huge risk-off move in all markets but also, probably after an initial knee-jerk reaction, some massive short-covering in the EUR. In other words, EUR/AUD could go for a big move higher?

Greece is in a world of hurt and it’s economy has gone into total stagnation. Not only that, but it also faces the issue of mass public unrest. The Greek politicians are left with an impossible choice and the EU politicians and financial bureaucrats seem to have lost patience with them.

If Greece were to decide not to agree to the rest of the austerity measures, accept total default and then leave the EUR, then the initial market reaction would be to sell the EUR. This is because of the supposed effect on EU banks, but remember they’ve had 12 months to prepare themselves. With the market already very short of EUR, surely a Greece-less EUR would look much more attractive and we then would see a massive short-covering rally. But risk-off sentiment would still be very strong, and this would impact heavily on currencies like the AUD. Therefore, if Greece were to leave the EUR, I’d be buying EUR/AUD.

The chances of something like this occuring may be less than 10% or perhaps less than 1%, but nevertheless it can’t hurt to be ready and have thought through all liklihoods beforehand.