There’s at least a one in three chance of Greece leaving the 17-country euro area within months of a June 17 election that could halt its international bailout, a report by Standard & Poor’s Ratings Services said.
An exit “could be brought about by Greece rejecting the reforms demanded” by European policy makers and the International Monetary Fund “and a consequent suspension of external financial support,” S&P said in an e-mailed statement yesterday.
Greeks will vote June 17 after an inconclusive May 6 election catapulted a party opposed to the rescue terms into second place. At the same time, the European Commission has warned Greece that it must pursue budget cuts with “determination” to be eligible for more emergency aid and the IMF said future discussions about the conditions attached to the 130 billion-euro ($163 billion) bailout wouldn’t change the objectives of the program.
Citigroup Inc. economists, who earlier forecast the chances of a departure at as much as 75 percent, now are assuming as a “base case” that Greece will leave on Jan. 1, 2013. Nomura International Plc said in a note last week it saw such a probability as “marginally above 50 percent.”
A Greek exit from the euro would probably lead to another sovereign default by the country, S&P estimated. Still, it doesn’t see countries facing rising borrowing costs imitating Greece.
“We believe that other sovereigns would be unlikely to follow any Greek exit, having witnessed the resulting economic hardships and long delay in harnessing benefits from national currency devaluation,” S&P said in its report. It expects “European partners would provide additional support to discourage further departures.”
S&P also said it expects a Greek exit would strengthen the resolve of countries already receiving bailouts to stick to the economic policies they pledged to implement. Portugal and Ireland are currently receiving aid packages from the European Union and the IMF.
“We consider it likely that the ECB would respond vigorously to any sustained rise in borrowing costs for other sovereigns,” S&P said in the report.
What is less clear is how so-called core members of the currency union would respond, the ratings company’s report said, creating a risk of debt restructuring in other countries.
A downgrade by S&P of the U.S. AAA credit rating last year was repudiated by investors, with Treasuries rallying in the days following the announcement.