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.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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