Straight from the Specialists
(The views expressed in this column are the author’s own and do not represent those of Reuters)
While the idea of a Greek exit from the euro zone has long been rejected by politicians and deemed nothing more than a “tail risk” by most investors, there has been a clear shift in opinion after the Greek election in early May failed to form a new government. The repeat election on June 17 is therefore critical to the country’s future in the euro zone and to financial markets worldwide. If Greece fails to form a new government, or forms one that rejects its bailout plan with official creditors, the probability of an exit would rise significantly.
Aside from the election, bank runs could speed up Greece’s departure from the currency union. Greek banks are technically insolvent, as they have not been recapitalised since taking losses when the government restructured its debt last March. The 50 billion euros planned for their recapitalisation has not been released by the creditors — the IMF and European Union — and is, in fact, part of the same bailout plan that is on the line in the upcoming election.
Our baseline scenario is that Greece will not exit the euro zone within the next six months — we put this probability at 20 percent — as we believe both the Greek electorate and the creditors understand that the stakes of an immediate exit are too high. Still, investors have been asking how they should be positioned in case this 20-percent probability does occur. The key worry is contagion and the consequences of the Greek exit spilling over to other countries such as Portugal, Ireland, Italy and Spain.
(Paul Donovan is a Managing Director and Global Economist at UBS. The views expressed in this column are the author’s own and do not represent those of Reuters)
The euro should not exist. More precisely, the euro should not exist in its current form, with its current membership.