Kurios times - Eurozone implications of a Greek exit

15 June 2017

The Greek situation is on a knife-edge. The country’s €1.6bn payment to the IMF is due this evening and even though they have confirmed that this debt instalment will not be paid, Greece still holds hope of agreeing on a hail-mary deal with its creditors.

If the €1.6bn IMF payment is one thing, the €3.5bn payment due on 20th July to the ECB is another. And the Greek government’s current game-of-chicken tactic is being seen by many as way of stating that they are fully prepared to default and essentially leave the single currency.

As it stands, deep down, everyone wants, or should want Greece to stay in the Eurozone. If it walked away, it would be doing so from some €317 billion of debts. Now that is a lot of debt, so one could sympathise with the notion of wiping that off the slate, but what you have to remember here is who they are borrowing the money from. The interest rate payable on their debt it would be miniscule and could be paid off over decades. Interest payments into the early 2020s would be around just 3% of GDP a year. 

By contrast, if Greece was to exit the costs would be huge, with banks likely going bust, export/import contracts broken and demolished confidence. That would be the short term and these implications would stretch to all Eurozone economies and definitely the UK. 

Yet long term, not everyone believes the outcome of a Greek exit would be so bad. Alan Cauberghs, senior investment director at Schroders has said that: "Greece’s links with the eurozone financial system have significantly declined in the wake of 2012, when one of the largest debt restructuring deals in history wiped €100 billion from Greece’s liabilities. 

"In October 2014, the degree of direct exposure to Greek debt by eurozone governments stood at €302 billion. This amounts to around 3 per cent of eurozone GDP (excluding Greece), and we believe that the direct impact of a Greek default should be limited."

He added: "If Greece outright and unilaterally defaults, it is likely to have significant market implications at least in the short run. However, we believe that structurally, global financial markets look well shielded from the fallout of such an event."

For now, everyone waits for the inevitable to happen this evening, hoping that an agreement can be reached.

Lloyd Hughes, Athena Advisors

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