Mario Draghi’s July 2012 pledge to do “whatever it takes” to keep the euro intact has kept speculators at bay for almost three years. Bond yields fell from Dublin to Athens, giving governments room to cut budgets and start revamping their economies.
While it’s not been a period of robust growth, the talk of crisis has abated and even Greece’s six-year recession ended.
What’s not changed is the risk entailed by Greece’s potential departure from the 19-nation currency bloc. What Citigroup Inc.’s Ebrahim Rahbari termed “Grexit” is back in play and it remains the worst possible outcome in the view of economists at Berenberg Bank and ING-DiBa AG.
Leaving the euro would make Greece a pariah in international markets, enforce a devaluation that probably would require capital controls and make banks fresh targets. The economy would probably contract again and the government would be pushed off the deleveraging and deregulatory policies that euro membership demands and which, while painful, have begun to bear some fruit.
To Holger Schmieding of Berenberg, such a backdrop would leave Greece as “Venezuela without oil,” a nod to the Latin America nation already skidding toward default.
After Greece, speculators would immediately size up the next potential victim -- from Cyprus to Spain and on to Italy.
While Europe’s policy defenses and vulnerable economies are now stronger, chances are of a rerun of the contagion of 2011 and 2012 when Portugal, Cyprus, Spain and Ireland all got bailouts. Elections are nearing in Portugal and Spain, while France and Italy are struggling to overhaul their economies.
“It would be a nasty precedent if Greece leaves as it could stimulate others to do the same, making it the first step of euro fragmentation,” said Carsten Brzeski, chief economist at ING-DiBa in Frankfurt. “The fact remains that losing one member of the family would ultimately open Pandora’s box.”
The status quo is worth preserving as Greece would keep getting the aid it needs and other European governments wouldn’t have to explain why prior loans went bad, Commerzbank AG economists led by Joerg Kraemer said in a report today. They put the likelihood of Grexit at less than 25 percent.
The political gamesmanship that marked the first generation of bailout plans has returned: Der Spiegel reported that German Chancellor Angela Merkel is comfortable with Greece leaving the bloc and that any fallout would be manageable.
Read that as a scare tactic aimed at persuading Greek voters not to elect anti-austerity Syriza in a Jan. 25 election. Prime Minister Antonis Samaras is also saying the vote will determine his country’s membership of the euro.
That may be a bluff. According to a report by Marketwatch.com, Barry Eichengreen of the University of California-Berkeley told a conference of economists this weekend that the fallout from Greece leaving the euro would still be “Lehman Brothers squared.”