Moody's: Impact of Greek exit from euro area should not be underestimated

The direct economic and financial impact of a Greek exit from the euro area would be small, but an exit would undermine the euro area's longer-term resilience somewhat and could yet trigger a more immediate confidence shock, disrupting government debt markets, Moody's Investors Service says in a report published today 

The report, entitled "Greek Euro Area Exit Might Be Manageable, But Risks Should Not Be Underestimated", is available through the links at the end of this press release. 

Moody's expects Greece (Caa2, Negative Outlook) to reach an agreement with its creditors and avoid default. However, lack of progress so far means the probability of a default, and of exit, is rising. 

"The impact of a Greek exit should not be underestimated," says Alastair Wilson, Managing Director -- Global Sovereign Risk. "The direct impact might be limited because of Greece's limited trade links and lower financial market exposure to Greece in other euro area countries. But exit could nevertheless cause a confidence shock and disrupt government debt markets." 

The report notes that neither the Greek government nor the electorate appear to view exit as desirable. The euro area authorities also have an incentive to avoid a Greek exit because it would set a significant precedent and crystallize losses to euro area authorities from loans to Greece. 

Default would not necessarily lead to Greece's exit from the euro area. The chain of events that could lead to exit is difficult to predict. Moody's would expect negotiations to continue for a period. However, should exit occur, it would set a significant precedent, undermining the resilience of a currency union that was designed to be irreversible. 

"Greece leaving the euro area would offer an example that might be followed in future," Mr. Wilson adds. "That would inevitably influence the course of future reform and fiscal consolidation programmes. It would raise, even if only a little, the likelihood that they too could end in default and exit." 

A more immediate threat could be a shock to confidence that damaged the functioning of euro area government bond markets. The risk of that happening is lower than in 2012, in part because the euro area financial system and economy are in a stronger position than three years ago. Policymakers' response to exit would determine the extent of any contagion, the report says. 

Should such a confidence shock occur, it would be particularly negative for periphery countries with high and rising debt burdens and ongoing fiscal consolidation challenges.