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2013, May 26

Eurozone Crisis: What Will Happen If Greece Exits?

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Eurozone Crisis: What Will Happen If Greece Exits?

by BlackRock Investment Institute, 24 May 2012
topics:
Risk Management
tags:
Eurozone crisis forex management
Europe’s crisis is accelerating and the next month looks critical. Greece is running out of money fast and local politics are in disarray. Banks are reeling from ratings downgrades, asset write-downs and fragile funding. Global markets again are held hostage by the eurozone’s turmoil.
 
This is a short- and long-term crisis. Today’s is all about funding, while tomorrow’s is about structural reform, finding the right mix of spending cuts and growth, and – most difficult of all – giving up sovereignty.
 
Politics will drive the outcome: If the US finds it tough to reach fiscal accord, consider the challenges of the 17 eurozone nations.
 
  • The political and market turmoil is likely to intensify in the run-up to the Greek elections on June 17. The election of an anti-austerity government could trigger a Greek default. This does not necessarily mean Greece would leave the eurozone, but it could spark bank runs that could potentially spread to Portugal, Spain and Italy.
 
  • Europe’s defences against this and other “contagion” risks are inadequate, with rescue funds still in gestation and no central decision making, we believe. The European Central Bank (ECB) has enough firepower to end any crisis immediately – but is loath to do so for fear of going beyond its inflation-fighting brief and giving a free ride to countries that do not even attempt to balance their books.
 
  • European policymakers have shown they will act decisively only in times of crisis – but their pain threshold is much higher than that of their US, UK or Japanese counterparts. This is because the weak (voters in indebted nations) do not vote in elections of the strong. No pan-European guarantee or plan will see the light of day without severe duress – on creditors and debtors alike.
 
  • We expect a call to action only at tipping points such as Spanish and Italian bond yields rising well above their November highs, massive deposit flight or severe bank funding problems. Paymaster Germany is likely to tweak its austerity prescription for the region: Countries’ willingness to pay matters more than their ability to do so.
 
  • The risks of a short-term cash crunch are currently low thanks to the ECB’s bank funding, we believe. We worry most about Spanish banks buckling under bad real estate loans. Longer term, the challenge is to wean banks off the ECB’s easy cash.
 
Click image to enlarge
Europe: A Tale of Many Nations
Key Data on Eurozone, the UK and Switzerland
 
 
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