Greek Euro Exit Risks Uncontrollable Contagion, SocGen Says

A Greek exit from the euro risks sparking uncontrollable contagion that may exhaust official funding sources, according to Societe Generale SA analysts.

Greece leaving the euro may lead markets to question the future of the currency shared by 17 nations, the bank said in a report today. Direct costs may reach 360 billion euros ($444 billion) or 3.8 percent of euro-area gross domestic product, the report showed.

“Although the direct costs of a Greek exit may be manageable, the reality is that such an event would demonstrate to financial markets that the single currency was not ’irrevocable,’” the report said. “The contagion from a Greek exit may therefore prove difficult to contain in an environment where both banks and sovereigns are already facing significant funding difficulties.”

“It is not hard to envisage a situation where the available official sources of funding are quickly exhausted,” according to the report, whose contributors include London-based economists James Nixon and Michala Marcussen and more than a dozen strategists.

European Central Bank President Mario Draghi said yesterday that without more aggressive action by policy makers the euro “is being shown now to be unsustainable unless further steps are being undertaken.” World stock markets lost about $4 trillion last month as the turmoil in Europe deepened following inconclusive Greek elections and the threat of Spain’s finances being overwhelmed by its banking crisis.

‘Wave of Contagion’

An exit “would undoubtedly unleash a wave of contagion transmitted through three main channels: potential deposit flight in other European countries, a significant increase in bank funding costs and the introduction of permanent currency risk premium into sovereign bond spreads,” the report said. “All of the euro area’s existing firewalls would have to be employed to stem the contagion which would probably see the need for the ECB to reopen its securities markets program and potentially conduct another LTRO” -- longer-term refinancing operation.

SocGen said also the ECB may insist on full use of the available resources of the European Stability Mechanism, the euro region’s permanent bailout fund.

To contact the reporter on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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