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OPINION

Grexit risk rises

Grexit risk rises
April 23, 2015
Grexit risk rises

The Greek government is due to pay the IMF €760m (£543m) on 12 May. If it misses that payment, the ECB could withdraw emergency aid to Greek banks. That would trigger a Greek exit because the country would need its own central bank to act as lender of last resort. Already, says Mr Britton, Greeks are withdrawing cash from banks. If this process accelerates, the government might have to impose capital controls - and these would be incompatible with membership of the euro.

Not everyone, however, believes a Grexit is certain. Holger Schmieding at Berenberg Bank puts the chance at around 30 per cent, and the betting market agrees with him: Paddy Power is offering odds of 2:1 against. Gilles Moec at Bank of America Merrill Lynch says that even if Greece does miss its payment to the IMF, it need not leave the euro. Instead, the threat of the ECB withdrawing support to banks could force the Greek government to accept austerity and labour market reforms as the price for continued financial support. This, though, would mean that uncertainty about Greece's position in the euro would continue for months.

Economists agree that a Grexit would be less troublesome for financial markets than it would have been two years ago. Non-Greek banks' exposure to Greek government bonds is, says Mr Britton, "negligible". And with the ECB buying government bonds as part of its quantitative easing programme, Mr Schmieding says that a sharp sell-off in other southern European government bonds "looks unlikely".

However, Marchel Alexandrovich at Jefferies warns that if Grexit does happen then equities "will certainly take a hit". Non-euro investors' losses on these would be amplified by a fall in the euro which, he says, would drop "comfortably past parity" against the US dollar.

A bigger danger, though, might come in the longer term. Grexit would mean that membership of the euro is no longer "irrevocable" as the architects of the single currency intended. This, says Mr Britton, "would encourage investors to test the resolve of other member states at the first sign of trouble".