S&P Sees At Least 1-in-3 Chance of Greece Exiting the Eurozone
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Standard & Poor's Ratings Services today published a report that examines the likelihood of Greece leaving the eurozone and the potential impact of this on the creditworthiness of other sovereigns in the region.
We believe there is at least a one-in-three chance of Greece exiting the eurozone in the coming months, following national elections on June 17. This could be brought about by Greece rejecting the reforms demanded by the troika--the European Commission, International Monetary Fund (IMF), and European Central Bank (ECB)--and a consequent suspension of external financial support. Such an outcome would, in our view, seriously damage Greece's economy and fiscal position in the medium term and most likely lead to another Greek sovereign default.
However, we note that the potential impact on other "peripheral" sovereigns in the eurozone would be less clear cut. We believe that other sovereigns would be unlikely to follow any Greek exit, having witnessed the resulting economic hardships and long delay in harnessing benefits from national currency devaluation, and that in the meantime their European partners would provide additional support to discourage further departures.
The report says that European policymakers would be keen to demonstrate that Greece is a special case. We would expect growing financial support and leniency in the face of slipping targets for other sovereigns embroiled in the debt crisis. Accordingly, we currently do not consider that a Greek withdrawal would automatically have any permanently negative consequences for other peripheral sovereigns' prospects of continuing eurozone membership. For the same reasons, it is our base-case assumption that a Greek exit by itself would not automatically trigger further downward sovereign rating actions elsewhere.
Subsequently, much would depend on the robustness of the response from European policymakers, the ECB, and the IMF. We expect that a Greek exit would likely strengthen the resolve of other countries receiving external support to pursue reforms and avoid the economic consequences of an exit, and we consider it likely that the ECB would respond vigorously to any sustained rise in borrowing costs for other sovereigns.
However, we believe the response of core eurozone member states is less predictable. Without appropriately sized and flexible financial mechanisms, the likelihood of a lasting restoration of confidence in major eurozone financial institutions over the near term is doubtful, especially at the periphery.
Although such a reluctant policy response is not our base-case assumption, it could lead to further sovereign debt restructurings in countries other than Greece and downward pressure on our ratings on affected sovereigns.
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We believe there is at least a one-in-three chance of Greece exiting the eurozone in the coming months, following national elections on June 17. This could be brought about by Greece rejecting the reforms demanded by the troika--the European Commission, International Monetary Fund (IMF), and European Central Bank (ECB)--and a consequent suspension of external financial support. Such an outcome would, in our view, seriously damage Greece's economy and fiscal position in the medium term and most likely lead to another Greek sovereign default.
However, we note that the potential impact on other "peripheral" sovereigns in the eurozone would be less clear cut. We believe that other sovereigns would be unlikely to follow any Greek exit, having witnessed the resulting economic hardships and long delay in harnessing benefits from national currency devaluation, and that in the meantime their European partners would provide additional support to discourage further departures.
The report says that European policymakers would be keen to demonstrate that Greece is a special case. We would expect growing financial support and leniency in the face of slipping targets for other sovereigns embroiled in the debt crisis. Accordingly, we currently do not consider that a Greek withdrawal would automatically have any permanently negative consequences for other peripheral sovereigns' prospects of continuing eurozone membership. For the same reasons, it is our base-case assumption that a Greek exit by itself would not automatically trigger further downward sovereign rating actions elsewhere.
Subsequently, much would depend on the robustness of the response from European policymakers, the ECB, and the IMF. We expect that a Greek exit would likely strengthen the resolve of other countries receiving external support to pursue reforms and avoid the economic consequences of an exit, and we consider it likely that the ECB would respond vigorously to any sustained rise in borrowing costs for other sovereigns.
However, we believe the response of core eurozone member states is less predictable. Without appropriately sized and flexible financial mechanisms, the likelihood of a lasting restoration of confidence in major eurozone financial institutions over the near term is doubtful, especially at the periphery.
Although such a reluctant policy response is not our base-case assumption, it could lead to further sovereign debt restructurings in countries other than Greece and downward pressure on our ratings on affected sovereigns.
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