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Analysts: Greece Now More Likely to Leave Euro

  • Jim Randle

Supporters of the 'No' vote wave Greek flags after the referendum's exit poll results announced at Syntagma square, Athens, July 5, 2015.

Supporters of the 'No' vote wave Greek flags after the referendum's exit poll results announced at Syntagma square, Athens, July 5, 2015.

Analysts say the resounding “no” vote by Greeks on their country's financial future increases the odds that the nation will have to stop using the euro, and that its current difficult economic situation will worsen. Sunday, Greeks voted to reject creditors’ demands for economic reforms, deeper austerity and greater cuts in spending in exchange for additional loans.

An editorial in The Wall Street Journal said Greeks have already seen some of the “ugly potential consequences” of voting no, with a banking crisis and limits on ATM withdraws.

Separately, Fitch analyst Athos Larkou writes that there is now a “dramatically” higher chance of a “disorderly” exit from the eurozone. He said an agreement between Athens and its creditors is still “possible” but time is short and there is a high risk of policy missteps or failure to make a deal.

Larkou said there is no precedent for leaving the euro, so issuing IOUs or creating a new currency would be an unplanned, “reactive” process that could cause “severe” damage to the Greek economy.

Duke University associate professor Tim Buthe said Greece will almost certainly have to leave the eurozone and would then have to introduce an alternative currency “almost immediately.”

Joseph Gagnon of the Peterson Institute for International Economics said converting contracts, bank deposits, loans and other business activities to a new currency would be difficult.

He also said many companies and banks would be stressed by having to repay loans denominated in the euro currency and might go bankrupt. The government would also struggle to avoid soaring inflation prompted by a lack of faith in the new currency.

Stephanie Flanders, JPMorgan chief market strategist for Europe, writes that even before the "no" vote, 59 Greek businesses were "going bust" every day, and that number is probably rising.

A report from Goldman Sachs Research said in the meantime, Greece's dwindling number of euros is likely to force Athens to resume bargaining with its creditors. Goldman said Greek negotiators have been pressing for cuts in their overall debt, but it is "highly underlain" that they will get such relief.

Columbia University professor Jeffrey Sachs said a generation of “egregious mismanagement” brought Greece to this “parlous state,” but that a country does not go bankrupt “without serious mistakes by its creditors,” and calls on them to reduce the amount of repayment they are demanding. Sachs said cutting the Greek debt makes sense because “a corpse cannot carry out reforms.”

Germany has been a key lender to Greece and a staunch opponent of debt relief. Sachs said Berlin benefited from debt relief after World War II, and is forgetting its history.

The Wall Street Journal editorial, however, calls on German Chancellor Angela Merkel and other Europeans to resist calls for easing Greek debt, even if the short-term consequences are serious.

The business newspaper writes that “pro-growth” reforms have begun to show “some progress” in other heavily-indebted nations. The editorial calls Greek demands for debt relief “political extortion,” and says giving in to Greece could derail needed economic changes in Greece and elsewhere.

Duke University’s Tim Buthe said the crisis will have an “important” impact on Greece that will have “little chance” to borrow on international markets, or be forced to pay a “risk premium” [high interest rate] to get loans; but he said the issue should have a “small” impact on the global financial system because the nation has only 11 million citizens.

JPMorgan's Flanders said she expects the crisis to cause volatility and sell-offs in European markets and have potentially serious long-term political implications for Europe. But if policymakers respond "reasonably decisively" to signs of contagion, she writes, the crisis will probably not pose a broader risk for European investors or the continent's economic recovery.

Analysts at Goldman Sachs Research say the reaction in the bond market has been "muted" so far, with only modest interest rate increases for other European nations with large debts. Goldman analysts say those interest rates could rise as the crisis continues and erodes lender confidence that a solution will be worked out.

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