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Greece goes to the polls this weekend, and whatever the result, we’ll likely have a clearer idea of Greece’s prospects for continued membership in the Eurozone.In a Financial Times editorial, Moritz Kraemer, S&P’s head of sovereign ratings for Europe, the Middle East and Africa takes a look at the downside scenario.
S&P sees at least a one in three chance that Greece will end up exiting the Euro. Here’s how Kraemer thinks it could unfold, from the FT:
“A Greek exit could be brought about almost by accident. A Syriza-led government that fundamentally rejects the reforms agreed with the “troika” – the International Monetary Fund, European Commission and European Central Bank – could lead to a suspension of external financial support.
Deprived of its last source of credit, the government would be forced to balance its cash budget immediately. Given Greece’s structural problems of raising tax revenues, the government may have little choice but to cut spending even more vigorously and to run up mounting arrears.
In such an environment, Greece’s economic decline is likely to gain speed, with additional job losses and the political and social crisis worsening. And where hopelessness and despair prevail, populist policy measures, such as a eurozone exit, may come to pass.”
Kramer assumes that action would be taken to prevent further exits, but insufficient intervention and a heightening of financial risks could call eurozone creditworthiness into question.
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