The eurozone would suffer a significant shock if Greece left, but it would be unlikely to trigger a systemic crisis like that in 2012, or another country’s rapid exit, Fitch Ratings says.
The immediate risk of Greece leaving the single currency was eased by last month’s agreement with its official creditors. But the uncompromising stance taken by both sides at times before the agreement highlights the possibility of a future policy mistake. “Grexit” is not our base case, but will remain a risk as more detailed negotiations take place, and as the Greek government tries to maintain domestic support for the deal it secures.
However, the eurozone has developed mechanisms to prevent a run on a sovereign leading to a sovereign default, and to alleviate sovereign-to-sovereign contagion, and concerns about other eurozone sovereigns’ creditworthiness are less pronounced than in 2012. A chain reaction from Grexit to the ultimate breakup of the bloc is therefore unlikely.
Grexit would be likely to trigger a default on at least part of Greece’s debt obligations. Other eurozone sovereigns’ exposure via the Greek Loan Facility and the EFSF is limited, and was debt-increasing at origination, so gross general government debt-to-GDP ratios would not be directly affected. We also think costs to sovereigns via default on bonds held by the ECB, and by the Bank of Greece on its Target 2 obligations, would be manageable.
The impact on foreign banks would be limited because they have already absorbed losses from Greece’s 2012 “Private Sector Involvement”, and have since managed down Greek risk.
Market reactions are hard to predict. If peripheral yields rose sharply, government debt dynamics could be damaged.
Grexit would demonstrate that membership of the single currency requires political acceptance of a tight fiscal stance and unpopular reforms to create an economy able to adjust internally. There is no other obvious candidate for exit, but in the medium term there would be greater exit risk for countries where political commitment to reform weakened. But Grexit might also spur a strengthening of eurozone institutions and therefore the currency union.
