The view that the euro zone could withstand a Greek exit is being questioned in banking circles, as one major institution warns that such a development could lead other weakened countries out of the single currency within months.
Although Germany and other European powers have been downplaying anxiety about the potential impact of a Greek departure, analysts at UBS warned of a “distinct possibility” that other unnamed countries would join Greece outside the monetary union if it left.
The UBS warning of “contagion via bank runs” came as difficult talks resumed between Greek officials and its international lenders on a contentious plan to unlock a new round of funding for the country.
Geopolitical risks
At the same time, the IMF warned of increased financial and geopolitical risks in the global economy. IMF economic counsellor Olivier Blanchard said “a Greek crisis cannot be ruled out”, saying such an event “could unsettle financial markets”.
Separately, Dutch cental bank chief Klaas Knot said in a report that a Greek default may have a contagion effect. “The already shaky liquidity position of Greek banks will worsen if deposits continue to flow out,” Mr Knot said. The impact of any bankruptcy “on other countries in the euro-area is still uncertain”, he said.
Greece denied a Financial Times report that it was preparing for a debt default in the absence of a deal, but the item spooked investors. Shares in Greek lenders lost more ground, with National Bank of Greece losing 5.3 per cent and Alpha Bank falling 10.8 per cent.
“Investors seem to have embraced the belief that if Greece were to walk away from the euro, it would walk alone with minimum contagion to other countries. This belief is dangerous,” said UBS.
Banking system
Analysts at UBS did not believe Greece would leave the euro as their base case scenario, but said its policymakers would have to convince bank depositors across the euro zone that the possibility of any other country leaving was nil if Greece left.
To do that, policymakers would also have to convince bank depositors across the euro area that a euro in their local banking system was worth the same as a euro in another country’s banking system.
“If that double guarantee was not utterly credible, then the risk of other countries joining Greece in exiting the euro would be high,” UBS said. “This suggests financial markets are treating the risks around Greek exit with too little regard for the probable dangers. However, the good news is that as long as policy-makers privately understand the enormous difficulty in containing the contagion and preventing a ‘domino’ effect, the incentive to keep Greece in the euro is increased.”
