Friday, February 10, 2012

>GLOBAL ECONOMICS VIEW: Rising Risks of Greek Euro Area Exit

■ We raise our estimate of the likelihood of Greek EA exit (‘Grexit’) to 50% over the next 18 months, from 25-30% previously. This is mostly because we consider the willingness of EA creditors to continue providing further support to Greece despite Greek non-compliance with programme conditionality to have fallen substantially.

■ We think that the costs of Grexit to the rest of the euro area would be moderate, as we expect post-Grexit exit fear contagion would be contained by policy action, if needed. In September, we viewed the likelihood and scale of exit fear contagion as much higher and the willingness of the euro area authorities to respond as lower.

■ In our view, the likelihood of policy action by the ECB and EA creditors to support fiscally weak and vulnerable, but compliant EA creditors has increased over the past six months. Policymaker ability to contain exit fear contagion remains large.

■ We continue to think that uncontained exit fear contagion would have grave implications for the rest of the euro area, the EU and the world at large.

■ We think that the Greek government will achieve an orderly but most likely coercive debt restructuring in its current negotiations with private creditors about private sector involvement and with the Troika on ECB involvement. We also expect agreement with its official creditors on a 2nd bail-out. Greece is therefore likely to avoid disorderly default when its next bond redemption is due (which is on March 20, but a seven-day grace period applies).

■ To remain in the euro area, the Greek government needs to exhibit a minimum degree of compliance with the fiscal and structural conditions of the bail-out programme. Alternatively, it could choose to temporarily cede authority over certain budgetary decisions to EU/EA representatives.

To read full report: ECONOMICS VIEW