The Connecticut-based consultancy has published a report projecting future FX market volume according to four different potential outcomes of the unremitting eurozone crisis: muddle through; a contained Greek exit; a core nation exit; and an outright break-up of the monetary union.
Like several other think tanks and research houses, Greenwich has amended its baseline scenario to an imminent Greek exit of the eurozone. But in contrast to the many alarming prophecies of the unavoidable spiral of doom this would create, Greenwich says the long-term effects, at least on the FX market, would be negligible.
The immediate effect would be a spike in volumes in the ensuing months, with total volume in the subsequent year rising by an estimated 7.5%, says Greenwich.
However, if the exit of the euro is firewalled to the periphery, overall volatility would be contained and volume in future years would be roughly 5.5% – a little more than the projected levels if Europe does manage to muddle-through the sovereign debt crisis in its current form, according to the report.
“The foreign exchange market has evolved into a highly liquid, transparent market that is resilient enough to absorb a eurozone break-up,” says Greenwich.
While the eurozone saga might seem like a never-ending story, the passage of time is also useful in giving Europe, global investors and companies time to prepare for a nation exiting the euro.
“As a result, we do not think that even a severe crisis leading to a Greek exit would trigger a Lehman-style systemic shock,” says Greenwich.
Only an uncontainable domino effect leading to the complete disintegration of the eurozone would see a substantial and sustained increase in volatility and volume.
In this case, Greenwich says volume would increase sizeably after the initial announcement, as contagion fears abound, hedge funds reposition, and long-only investors and corporations increase hedging activity. The report estimates the average annual volume increase would be nearly 14% in the five years subsequent to the fall of the monetary union.
The wider upshot would be a deep and prolonged cycle of recession, civil unrest and stagflation.
However, if Greece were the only country to abandon the single currency, the impact on global FX markets would be small, given the relative size of the Greek economy within the world economy.
Greenwich note that even pre-euro, the drachma accounted for only 0.6% of European FX volumes and 0.5% of global volumes.
The FX market is now the biggest and most liquid market in the world, driven by technology and a burgeoning field of participants that is set to grow further as emerging markets play a more important role in the global economy.
“From a long-term perspective, a Greek departure – assuming it is contained at the periphery and does not threaten the core eurozone structure – would be a blip on the screen,” says Greenwich.