24th May 2012

Jaydeep Kashikar is not just one of the most successful advisors in Mumbai, but is also widely regarded as one of the finest advisors in Mumbai and the country. His approach of active advice and taking well reasoned calls on markets and sectors have enabled him to consistently deliver alpha and charge fees for his advice. His clients, like most investors, have watched the Greek tragedy play out in slow motion and shatter global sentiment. He recently wrote to his clients, giving his take on the Greece situation and arguing why he believes that the Euro will not perish as a result of a Greek exit, but may actually emerge stronger as a result. He has very kindly forwarded his note to his clients to us, for wider dissemination among the advisory fraternity. Read on to get his unbiased views on this key global phenomenon and remember his key message : Greece exiting the Euro is not going to bring back another 2008 type market meltdown. The odds are stacked in favour of an orderly exit of Greece from the Euro. Indian investors need not panic when the decibel level on a Greek exit increases in the coming weeks. Remain focused on accumulating systematically in this market.

If Greece pulls out of Euro, will EURO continue or will become extinct? What will be the implications?

EURO was formed by 12 countries to combat US Dollar. Then 5 other countries joined in. Now 17 countries have a common currency EURO.

Its now been over 18 months since Greece exit has been discussed & has given enough time of EU to think how to handle the Greece exit. So, firstly its not that EU is totally clueless on the procedure / implications on Greece exit as portrayed by the media.

Whether Greece (which represents only 2.5% of eurozone economy) will exit EURO or not, is now more of a political issue there than anything else. People in Greece are not happy about the austerity measures of salary cuts & extension of working age. Also over long term, for Greece, devaluation of new Drachma would mean competitiveness for trade as they are in urgent need of Growth than Austerity. But to begin with, their exit means ~60% devaluation in new currency drachma, hyperinflation & civil unrest in Greece.

Its not that if Greece exits, EURO will break as neither other smaller countries like Italy & Spain would want to exit as that would result in no further aid to their banks from EU, IMF & ECB (so called Troika). Also no other country will follow Greece as it will be open for all to see Greece's economic horror. Also, Germany which consists of only hardworking population and a very strong economy doesn't want their own currency as it will double in value in weeks which will effect its huge exports economy.

Most Likely Solution

There will be furthermore tremendous negotiations between Greece & EU, and Greece will exit in an orderly manner in which European banks will have to take one-time cut aided by ECB. This will not impact global markets as the magnitude of expected losses to banks is very much known by the markets and well priced in unlike in 2008 when US banks news came suddenly & surprised all by the magnitude which was unknown.

Most certain situation

Even if Greece exits, EURO will remain!

Also Euro will emerge stronger after Greece exit.