I have often said that Greece would be able to better serve its citizenry in the long-term if it regained its monetary sovereignty by leaving the EMU and restructuring its debt. ING recently detailed a potential scenario should that occur. According to ING, while the results would be harmful, they would not be the end of the world as many presume:
1. Scenario I: a ‘stage-managed’ exit of Greece
- At the mild end of the spectrum, the most plausible scenario is that Greece is the only country to exit the Eurozone.
- Greece is the most challenged from a solvency and a competitiveness perspective, and it is most observers’ favourite candidate for leaving EMU.
- The modest size of the Greek economy means that its departure would be far less disruptive than if one of the bigger economies were to leave.
- Our assumption is that Greece’s exit does not happen in a chaotic manner. The Eurozone and IMF would provide medium-term funding to ease the pain of Greece’s exit.
- The Greek exit gives further impetus for reforms in other highly-indebted countries such as Spain and Portugal.
In scenario 1, Greek exit, the impact is clearly heaviest in Greece itself, there would be non-trivial effects on the rest of Europe. Greece suffers a deeper recession in 2011 than in our baseline, with GDP 7½% lower. Other Eurozone countries suffer falls in output of up to 1%Given Greece’s large twin deficits we see the new Greek Drachma falling 80% against the EUR.
What would be the impact on specific markets?
- Credit spreads in core countries widen but less than their periphery counterparts. General spread widening is muted in comparison to the credit crisis of 2008.
- Nonetheless, even core German corporate credit spreads widen by 90bp in 2010.
- Contagion sees spreads rise by some 130bp in other peripheral markets for A rated corporate debt. In terms of BBB ABS the periphery sees spreads blow but by 200bp in RMBS, 400bp in credit cards and 700bp in auto loans.
- But none get close to credit crisis peaks. Later in 2011 there is some retracement, but not towards current levels.
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