Greece ‘ring-fenced’ from rest of eurozone

Money markets have been much more subdued about this week’s technical default by Greece on a key debt repayment than in previous bailout negotiations, yet an exit from the eurozone still remains a possibility.

The cash-strapped Mediterranean country missed the deadline for a debt repayment to the International Monetary Fund (IMF) earlier this week, and uncertainty remains about its ability to meet future repayment obligations.

Greek Prime Minister Alexis Tsipras has called a referendum for this Sunday, 5 July, to decide whether Greece should accept the tough terms of its creditors.

A ‘no’ vote would effectively be seen as a vote to leave the eurozone, while a ‘yes’ vote would put enormous pressure on Mr Tsipras to resign. Both scenarios would see considerable instability in Greece, and potentially affect the cost of sourcing funds on international markets.

But Darren Williams, senior economist for Europe at investment management and research firm AllianceBernstein (AB), suggests that eurozone policymakers have the tools to manage any fallout from a Greek exit.

“The rest of the euro area periphery is likely to come under pressure, but the region has the tools – in the form of the European Stability Mechanism, ECB quantitative easing and outright monetary transactions – to prevent volatility from spiralling out of control,” Mr Williams said.

“In our view, the ECB is willing and able to do just that. With the QE program in place, the central bank can calibrate its moves to address turbulent conditions, for example by adjusting the speed and composition of bond purchases as trouble spots arise.

“Indeed, the ECB said on 28 June that it was closely monitoring developments and was prepared to respond if necessary.”

Greece has effectively been 'ring-fenced', with investors distinguishing between it and the rest of the peripheral eurozone countries, Mr Williams said.

“All this suggests that the authorities should be able to contain the spillover to other economies and markets more generally,” he said.

“Still, we are conscious that a Greek exit would represent a step into uncharted territory, with unpredictable consequences. The outlook is therefore highly uncertain – but would be much more so if the ECB weren’t acting as a backstop.”

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Adam Zuchetti

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