Markets strive to price in cost of Greek exit
IMF chief Christine Lagarde has warned that a Greek exit from the euro would be “extremely expensive” as analysts step up their war-gaming of a disaster scenario that would see Athens crash out of the single currency.
Bank of America Merrill Lynch analysts have estimated that Greece will have just €1.3bn left by the end of May and could run out of money in June if its bailout funds are not disbursed.
In a paper on the consequences of a possible Greek exit, the BoA/ML analysts say that the ECB could lose €35bn, but is unlikely to require recapitalisation unless other countries also fall out of the single currency.
Broadly, the analysts conclude that an exit for Athens will not be disastrous for the rest of the Eurozone but “should the impact of a Greek collapse extend to larger countries—such as Spain or Italy—the future of the entire Eurozone project would be in tatters”.
The main fear is a run on Spanish banks, which would likely force Madrid to seek a Eurozone-sponsored bailout for them.
Markets have also been shaken by the gaining popularity of the radical left Syriza party led by Alexis Tsipras, who won popular support by playing hard-ball during coalition negotiations and who could take first place in Greece’s new round of elections.
Yesterday he told CNN: “I don’t know what Madame Merkel wants to do but I know what we want to do… We don’t want outside the Eurozone. But we believe that Madame Merkel put the euro and the Eurozone in big danger by keeping these austerity measures.”
He also said: “Everybody now understands that with this [austerity] policy we are going directly to the hell. And we want to change this way.”
Investec analysts were more sanguine: “In our view the market has all but priced in a Greek exit from the euro.”
It is not clear, however, whether markets can price a Greek exit without also estimating the cost of possible contagion.