There are plenty of potential scenarios from here, not all of which include a Greek exit from the euro. But the 1 in 4—or 1 in 3—chance we have ascribed to that outcome in previous notes was based on an expectation that Greeks were likely to vote “yes”. With this “no” vote we have moved firmly onto the Grexit side of the decision tree, with a messy Greek exit now more likely than not.
We can expect this to cause volatility and sell-offs in European markets and potentially very serious long-term political implications for Europe. However, assuming that policymakers respond reasonably decisively to signs of contagion, we do not currently believe the result poses a broader risk to European investors or the European recovery.
ECONOMIC AND INVESTMENT IMPLICATIONS
Whatever happens, the road from here is going to be extraordinarily costly for Greece’s people and its economy. The consensus forecasts for the Greek economy this year have tumbled as relations between Greece and its creditors have deteriorated. On average, 59 Greek businesses have gone bust every day since the start of 2015. That number will have soared with the closure of the banks, and the timing could not be worse for Greece’s main industry—tourism—as foreigners are already rushing to cancel family holidays in Greece.
However, Europe’s economy has not been seriously affected by the Greek crisis so far. We can say the same for European financial markets. There has been a “risk-off” mood in markets since the referendum was called, but the spread between periphery and core sovereign borrowing costs is still far below previous peaks and has not been hugely affected by the crisis. Meanwhile, the Libor-OIS spread—which has spiked in previous crisis periods—has not moved at all.
A Greek exit from the Euro would be costly to Europe’s taxpayers – and legally very messy to the extent that it is likely to involve heavy losses for the ECB. It would also have important long-term consequences for the Eurosystem and the future risk premium on Eurozone assets and also raise more immediate geopolitical concerns if Greek membership of NATO or the European Union was brought into question. These risks are literally incalculable, but they can hardly be ignored.
All that said, however, we do not believe the crisis poses major immediate risks to peripheral economies, the European financial markets or the eurozone recovery, all of which are now much less exposed to and better equipped to deal with Greek contagion than they were in 2011 and 2012. In theory, at least, the ECB also has much more effective tools available now to deal with any tightening of financial conditions that results from the Greek vote. Policymakers have signalled previously that they stand ready to make use of those tools, should market conditions warrant it.
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