Greek's euro exit a plus to EU partners, IMF: S&P

The rating agency yesterday issued a report that said the chances of Greece exiting the euro zone were now at least one in three, posing huge risks to the country’s creditors and tough times ahead for the Greeks as a whole.

To the frequently asked question, “What are the potential downside risks for weaker sovereigns in the euro zone?”, S&P said: “We expect that a Greek exit would likely strengthen the resolve of other programme countries to pursue reforms and avoid the economic consequences of an exit. 

“We also consider it likely that the European partners and the IMF would take a very supportive stance in order to prevent concern regarding additional departures.

“Nevertheless, it remains uncertain whether these efforts would be perceived as sufficient in scope and scale.”

The rating agency acknowledged that any signal of a possible Greek exit could reinforce commitment to restructural reforms, but it could also paint an impression that euro-zone membership is reversible.

While saying that much of the burden would fall on the European Central Bank, S&P believes that without a robust policy response from euro-zone political and monetary authorities, a Greek exit may hasten further capital outflows from the periphery of the European Union’s currency area. 

Downward pressure on sovereign ratings is in the picture, if the national and European policy response is proved inadequate to restore depositor and investor confidence, it said, adding that economic and financial problems could escalate, including the possibility of sovereign-debt restructurings in countries other than Greece.

“At present, this turn of events is not our base-case scenario, as reflected in our current ratings. 

“Nevertheless, we are also mindful that a policy response to a potential Greek exit that is insufficient to credibly arrest contagion could create significant additional downside pressure on sovereign ratings. 

“This applies especially, but not necessarily exclusively, at the euro-zone periphery,” S&P said.

The rating agency does not expect other euro-zone members to follow a Greek exit, after the clear negative on creditworthiness and consequences that Greece would experience. 

For now, no political party attaining power in the periphery is expected to show support for a euro-zone exit, it said. 

“In our view, should Greece actually withdraw, its European partners would provide additional support and flexibility, as appropriate, to dissuade additional euro-zone departures. We believe that policy-makers would be keen to demonstrate that Greece is a special case and would expect growing financial support and leniency in the face of slipping targets for other sovereigns embroiled in the debt crisis,” the company said.

For now, S&P said there was no pressure on other sovereign ratings. Much will depend, however, on the European policy reaction following any Greek exit.

The company is of the view that a euro exit and readoption of the drachma would be very costly for the Greeks. Though this would temporarily boost exports, it would not solve Greece’s fundamental problems, namely lack of competitiveness and large imbalances.

Greece imports 40 per cent of its food consumption and virtually all of its oil and gas needs. This would pose a problem for its current-account deficit. 

“We believe that a rapid devaluation of the real effective exchange rate would, moreover, almost certainly diminish efforts to continue growth-enhancing supply-side reforms and correct the structural rigidities that have held back the Greek economy for decades,” S&P said. 

It noted that Argentina had survived a devaluation because its export sector then was working below potential capacity, which is not the case of Greece. 

Greece’s tourism sector, now generating 11 per cent less in current-account receipts than at its 2008 high, might initially benefit, but it is also relatively import-intensive and might suffer a reputational setback from the economic crisis and dissolving social cohesion. 

 

Inflation, bankruptcy risks

Greek inflation would also likely surge as imports became more expensive, further reducing citizens’ living standards, said S&P. 

“We expect that the introduction of a new currency would also lead to a likely wave of personal and corporate bankruptcies as debtors fail in their struggle to service euro-denominated obligations on devalued drachma incomes,” it said.

While some private loans could be legitimated under Greek law, this may be contested in overwhelmed courts and lead to problems at the creditor level, the company warned. 

The Greek private sector also has accumulated a large stock of debt contracted abroad, which remains payable in euros irrespective of decisions made in Athens. 

As the government may default on repayments, Greece could be shut out of access to trade financing and import-insurance markets. 

The country could find it challenging even to finance the import of basic necessities, such as energy and medicine, S&P added.