Greece is most likely to leave eurozone in next three years, survey of top investors and bankers shows

News - Funds

Written by Ray Clancy

Tuesday, 29 June 2010 10:00

Greece is most likely to leave the eurozone followed by Portugal, Spain and Ireland as debt problems facing these nations raise questions about the monetary union’s future in its current form, according to top investors and bankers.

Almost half of 440 senior executives surveyed by RBC Capital Markets agree that there is a greater than 50% chance of one or more countries leaving the eurozone in the next three years. More than a third see at least a 25% chance of a complete breakup of the eurozone over the same period.

The research found that Germany is regarded as the fifth most likely country to leave the eurozone, possibly reflecting concern that the German government may lose confidence in the monetary union if the current crisis continues.

While the prospect of a G20 economy defaulting on its debt remains relatively low, almost a third of the respondents place the odds of this occurring at 50% or more, indicating a rising concern that the debt problems facing the global economy may spill outside the eurozone.

Among those who foresee a significant chance of a G20 default, Italy received the most votes, followed by Argentina, Turkey, Mexico and Russia. The UK is perceived to be the Western European country, after Italy, most likely to default on its debt, both within the G8 and the G20.

When it comes to currency, some two thirds of the executives questioned believed the value of the euro will continue to slide over the next 12 months. While 80% believe the dollar will remain the dominant reserve currency in three years’ time, with the consensus dropping to 57% over a five year period.

RBC says this says more about the lack of real alternatives, rather than confidence in the dollar, and is further illustrated by the fact that more respondents, some 15%,see the Chinese renminbi as the reserve currency of choice within five years rather than the euro, 12%, despite the low likelihood of this occurring.

Although the dollar is expected to remain the world’s reserve currency for the near future, 40% believe that over the next three years the currencies of exporting countries, such as the Persian Gulf States, Taiwan and Hong Kong, will stop being pegged or managed closely against the dollar.

The respondents also predicted an increasing growth imbalance between Europe and the rest of the world, even as US economic influence is seen to be waning, with over two thirds, 66%, in agreement. Some 56% believe that emerging markets such as China, Brazil and India will replace the US as a source of demand driving global growth.

‘Rising government debt in the developed world and the re-balancing of power between developed and developing nations poses questions over the outlook for currencies. The downside of growing sovereign debt and pressure on currencies such as the euro is clear,’ said Richard Talbot, co-head of global research at RBC Capital Markets.

‘However, it is the dynamic of the relationship between the world’s creditors and the world’s debtors and their currencies that will ultimately determine the competition for and the cost of capital in the new era,’ he added.