We would expect that a distressed Grexit from the European single currency would have severe consequences for the Greek economy, its banks, and nonfinancial companies. Greece would permanently lose access to financing from the ECB, which, in our opinion, would create a serious foreign currency shortage for the private and public sectors. Without the Eurosystem's support—which, according to our estimates, currently exceeds 70% of GDP – Greece’s payment system would shut down and its banks would not be able to operate. The value of euro-denominated public- and private-sector debt, as measured in the new currency, would increase as it depreciated against the euro, thereby exacerbating the situation. Based on a simulation by S&P and Oxford Economics, the overall economic impact of a Grexit would be severe for Greece but more contained for the rest of the eurozone. According to this study, real GDP in Greece would fall 20% below the baseline after four years.
S&P believes the impact of Grexit on insurers would be limited and would unlikely lead to rating actions. European insurers have significantly reduced their direct exposure to Greece since 2010, although a significant part of this reflects incurred credit losses on their Greek bond holdings. There has also been a general trend for insurers in the core eurozone countries to reduce exposures in the periphery in recent years, reducing the investment risks that could result from a country leaving the eurozone. S&P does not have any ratings on Greece-domiciled insurers. However, some of the largest Greek insurers are owned by rated foreign insurance groups. The direct exposure of these groups to domestic Greek assets is only a small proportion of their total investment portfolio. Moreover, we observe that some of the local Greek subsidiaries of these groups invest the majority of their assets outside of Greece. This reduces the direct credit risk in their asset portfolios and provides a degree of balance-sheet protection from currency redenomination risk.
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