Greece Leaving the EURO? Not so Fast

The German publication Spiegel Online broke a story this afternoon that Greece is considering withdrawing from the euro and returning to the drachma, without revealing the source of the information. Allegedly a secret crisis meeting is being held in Luxembourg late tonight to discuss the restructuring of Greek public debt, with attendance limited to the Eurozone finance ministers and senior staff members.

Assuming the information is reliable concerning a meeting tonight to discuss restructuring Greek debt, we’d like to offer a few reasons why  the prospect of Greece leaving the euro over the immediate to medium term is utterly unreasonable, that therefore unlikely:

1.   The EU has battled over the last 18 months to contain sovereign debt across the region, earmarking  a total of €273 Billion to bailout Greece, Ireland and Portugal, and established both temporary (EFSF) and permanent (ESM) bailout funds to the tune of €500-750 Billion (including IMF support) to aid countries in fiscal “need”. While there has certainly been push back across member states on the guarantees for the funds, the bottom line remains that they’ve come together to “economically” support the currency union.

2.   To further underline the point of support, commitment to the union is more than just a monetary sum, but the belief that the union as a principle is sound, which is to say that the union provides mutual benefit, or that the whole is stronger than the individual parts. This commitment comes from the very top, including President of the European Council Herman Van Rompuy, President of the European Commission Jose Manuel Barroso, ECB President Jean-Claude Trichet, and European Commissioner For Economic and Monetary Affair Olli Rehn (to name a few) on down to all the foot soldiers in Brussels fighting for their constituents.

There’s no chance these Eurocrats are going to let one country at this stage of the game (the infancy of the union) threaten the union, neither in principle nor in the name of their job. And should Greece leave, there’s obviously contagion risk that other members, particularly the peripheral countries, would follow suit. While we’ve argued that from a competitive standpoint it could be far more effective for certain Eurozone members to have their own monetary policy (and therefore currency), it’s not politically expedient, and therefore won’t happen over the medium term. (Note we’re not limiting this outcome over the longer term).

3.   Greece is “sufficiently” capitalized with the bailout moneys received from the EU/IMF until 2013 so a departure from the euro, and therefore a default on its euro-denominated debt doesn’t make sense at this point (also ~ one quarter of EUR-denominated Greek debt is held domestically, making hardships at home unnecessary at this juncture)

4.  Counter liabilities across countries are huge, with Germany and France having the most skin in the game. The impacts from Greece and possibly others leaving the union, suddenly, would have such severe impacts on the government balance sheets, and the banks across Europe, that it would cripple the entire continent.

----

It seems far more likely that these meetings are being called to discuss the back and forth over recent days about the prospect of Greece restructuring its debt, a position Greeks deny the need for, while select European voices continue to press.  Greece’s equity market (Athex) had a tough week, closing down 4.5% w/w as sovereign cds and government yields remain elevated, with the Greek 10yr yield at 15.5%. That said, we’re not seeing a freak-out in risk intraday that would confirm the validity of the likelihood that Greece leaves the union.

If anything, a serious talk about Greece’s public debt and the prospect for restructuring was probably in order, and the weekend will help shield some of the downside risk to the meeting’s announcement. 

As we continue to highlight in our research, Europe’s sovereign debt contagion is far from over—this has a long term TAIL. Regardless of the monies secured by states, the pain of overcoming years of fiscal imbalances is not an overnight event. We expect headline risks for the EUR and European countries to persist as the region works through its fiscal imbalances and investor fears shift within the process.

Matthew Hedrick

Analyst