FYI | May 17 2012
By Greg Peel
ANZ believes the odds of Greece leaving the eurozone are only 30%, hence the odds of the zone remaining intact as is are 70%. This is no lone stance from one economist, rather an opinion signed off on by ANZ's forex, credit, interest rate and global market strategists and economists.
While the rest of the world is assuming no foregone conclusion, consensus has a Greek exit as the only outcome. The second election is unlikely to turn Greece's popular tide back again towards an acceptance of austerity as a necessary evil of EU financial support. Rather, the swing is toward the misguided promises of those leaders assuming financial support can be maintained, and a eurozone membership can be maintained, at the same time as harsh austerity requirements are politely refused.
While EU leaders may well prefer to keep Greece in the eurozone in fear of contagion, there must also be a contagion factor in caving in to Greece's demands. What of the bail-out packages for Ireland and Portugal? What of unrest in Spain? Perhaps if the new French president can sway the German chancellor towards growth rather than austerity (which is likely given her political days are numbered as well) then a new deal for Greece et al can be negotiated. But remaining eurozone and EU members will not support further member contributions to bigger bail-outs, one must presume, without some concession.
Global markets have entered another familiar risk-off phase as yet again Greece has dominated the headlines, but realistically the sell-off could have been much worse to date. There appears to be at least a sufficient cohort of investors prepared to gamble life without Greece in the eurozone (the possibly painful solution but at least a quick-fix) as opposed to suffering through more years of tedious headlines from Athens. Yet no one is really sure just how much pain there might be initially, or whether there will be contagion, or whether the whole euro model might collapse.
“The costs associated with a [Greek] exit are high for all parties,” the ANZ team suggests, “and are likely too high in the current fragile environment for all players”.
Hence the 70% ascribed probability of no exit. Within that 70% ANZ sees only a 20% chance of Germany maintaining a hardline and enforcing current policy and a 50% chance of Germany being conciliatory and moving towards a new “growth pact” for the eurozone.
In both cases ANZ sees a need for the ECB to cut its cash rate further and to cap runaway sovereign bond yields through purchases. A priority is to recapitalise Spanish banks. The planned fiscal union must be a longer term goal and a euro-bond will need to be introduced. Importantly, the ESFS and ESM bail-out/firewall funds will need more capital.
That last one is a bit of a sticking point, but then we should consider the other side of ANZ's odds – a 30% chance of a Greek exit. Within that 30%, ANZ sees a 25% chance of an “orderly” Greek exit, a 4% chance of a “disorderly” Greek exit, and a 1% chance of a complete disintegration of the eurozone.
All possibilities include ECB rate cuts, capping yields, and boosting bank capitalisation. Only one – the 1% rated disintegration possibility – does not include more capital injections for the firewall funds. If the zone splinters it will be every man for himself.
As for how the markets might respond to each of these scenarios, ANZ offers its thoughts in terms of “risk assets” and “risk off positions”.
If Greece stays in and the eurozone shifts towards growth over austerity (50%), some support will be provided for risk assets. Status quo (20%) means defensive assets should be favoured as the eurozone “grinds on”. ANZ would only exit risk-off positions on a “clear signal” the zone is shifting towards growth over austerity.
An orderly Greek exit (25%) combined with a shift to growth over austerity will initially provide modest support for risk assets but would require a very strong commitment from other members and and ECB support. A disorderly exit (4%) or a complete eurozone break-up (1%) would see a strong shift to defensive assets.
I'll throw in my two bobs worth here. Remaining eurozone members will be prepared to inject more firewall funds if, and only if, Greece is shown the door. Any attempt to seek further contributions to keep Greece in the zone, which would implying conceding to Greek political demands, will find Germany looking friendless. Further contributions will also require the aforementioned shift to growth over austerity. Germany will also be friendless, and Merkel looking like a dead woman walking, if it stubbornly holds out for the status quo.
Members do not want to see the zone fracture, but only a shift away from austerity will calm popular unrest. A Greek exit will be very well received in the rest of Europe, and with a new growth policy each sovereign electorate will be sufficiently appeased to support its government in circling the wagons along with the other members, in order to prevent contagion. The ECB printing press will need to be shifted to turbo, and bank balance sheets shored up ahead of an otherwise inevitable run.
But that's just my thoughts.
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