Grexodus; how likely is a Greek exit from the Eurozone?

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28/04/2015
Since 2010, speculation over a Greek exit has emerged with fluctuating degrees of intensity throughout the media. It has intensified significantly in the past two months. In spite of the Syriza government reaching a transitional agreement with creditors, negligible progress has been achieved on finalising a repayment package since.

Speculation has now reached fever pitch, following a meeting of Eurozone finance ministers last Friday in Riga, Latvia, in which Greek finance minister and committed anti-austerity campaigner Yanis Varoufakis was reportedly ridiculed by all other attendees. Hundreds of mainstream articles in the days since have raised the prospect of an imminent Greek exit from both the Euro, and the European Union; yesterday, a Reuters poll of money market traders pointed to a 40 per cent chance of a ‘Grexit’, and a survey released this morning by research firm Sentix indicates that around half of investors expect Greece to wave goodbye in the next 12 months.

However, how likely is a Greek exit? Ultimately, there are three possible outcomes for Greece.

  • A deal is struck, which establishes a modest repayment plan that does little to reduce Greek debt overall, but diminishes certain liabilities
  • No deal is finalised; Greece, like Cyprus, defaults on a certain proportion of its debt, but remains a member of the Eurozone
  • Greece exits the Eurozone entirely

Wouter Sturkenboom, senior investment strategist at Russell Investments, believes the first option to be the most likely.

“A Grexit is highly unlikely because both the Greek population and Eurozone political leaders do not want to go down this risky route,” Sturkenboom remarks. The cost of servicing the Greek debt is currently very low in relative terms, at 2.6 per cent of GDP. “This is lower than that of every other peripheral country,” Sturkenboom notes, “so not reaching a deal would turn a short-term liquidity crisis into a solvency crisis, which would represent failure for both sides.”

“It is more likely some sort of deal will be struck. Varoufakis’ replacement in the Greek negotiation team yesterday also points in that direction,” he believes.

Furthermore, Sturkenboom believes volatility in Eurozone equities and peripheral bonds related to Greek unrest represents a buying opportunity. For him, the apparent higher risk of a Grexit is a mirage; speculation will not have a negative credit impact on other Eurozone members – and any negative credit impact on Greece “will be short-lived and largely isolated,” he concludes. “Greece is not capable of derailing the Eurozone recovery – nor is there a real risk of contagion to the periphery.”

Joerg Kraemer and Christoph Weil of Commerzbank believe the risk of a Greek exit to be roughly one in four; “despite the exhausting game of poker, ultimately neither Syriza nor the European Union want an exit from the Eurozone.” Moody’s appears to agree. “The likelihood of a Greek exit is still lower than during the peak of the Eurozone crisis in 2012 – and is unlikely on its own terms,” the ratings agency notes in a report.

Time is undoubtedly dwindling for Greece – if no agreement is reached by June, the country will face insolvency. However, the will for a covenant of some kind evidently exists on both sides. European Commission President Jean-Claude Juncker has made it clear in the past week that the EU is preparing for a number of different outcomes in respect of Greece – “but I am excluding a Greek exit 100 per cent.” Likewise, Greek President Prokopis Pavlopoulos categorically ruled out a Greek departure in an interview with Der Spiegel yesterday. “In the late 1970s, Greece fought a great battle to join Europe,” the President recalled. “It is not conceivable to see Greece outside of Europe. The thought of Grexit does not even enter my mind.”

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