The looming prospect of Greece leaving the euro could cost non-Greek investors more than $400bn (£250bn), even ignoring knock-on costs. And the potential damage from contagion in other eurozone periphery countries is several times higher again.
Official figures show that, at the start of this year, Greece had $475.8bn of government and private sector foreign debt. Marchel Alexandrovich at Jefferies International warns that much of this would be lost if Greece leaves the euro, either because it would be repaid in near-worthless drachmas or because Greeks would formally default on it. “Kicking a country out of the euro may actually end up doing more damage to those staying behind,” he warns.
Eventual losses could be even greater than this. Portugal has $480.7bn of foreign debt, Italy $2.34 trillion and Spain $2.3 trillion. If a Greek exit causes investors to fear even a slight chance of these countries following suit, they will become reluctant to hold such debt. The countries’ bond yields would then soar, and European banks, fearing losses on their loans, will become reluctant to lend even to creditworthy companies in the “core” of Europe. Laurent Fransolet at Barclays Capital says there are already signs of this happening, as some foreign investors have sold Spanish and Italian bonds, worsening market liquidity and forcing their yields up. In theory, the ECB could solve this problem by buying the bonds itself. It did this last year, on condition that Spain would cut its government borrowing. With Spain’s now deficit exceeding forecasts, it might be reluctant to step in again.
The key to whether Greece stays in the euro will be next month’s general elections. Some analysts hope that the public’s support for staying in – according to polls over three-quarters want to do so – will drive them back to vote for the pro-bailout parties, Pasok and New Democracy. If this doesn’t happen, then Greece will either renegotiate the terms of its bailout – which would require German finance minister Wolfgang Schauble to step down from his claim that the agreement is non-negotiable – or default on its debts, which might require it to leave the euro.
Charles Dumas at Lombard Street Research says an exit is “far more likely than not.” He thinks this would be the country’s best hope of creating jobs. If he’s right, other countries might follow, which would inflict huge losses upon euro area banks.
Greek savers seem to be anticipating an exit. There are reports that they have made huge withdrawals from Greek banks, in an attempt to prevent their savings being devalued by being redominated into cheap drachmas. Simon Ward at Hendersons says that Greeks have €66bn in overnight deposits and all this could be withdrawn. If this happens, he says, the run on Greek banks could be so severe as to “push Greece out of the euro well before next month’s elections.”
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Chris blogs at http://stumblingandmumbling.typepad.com