Grexit regional contagion watch
Sell-side analysts have had at least two years to hypothesize the likely impact of a Greek exit from the eurozone – here's Nomura's latest take on the likely spill-over effects.
Nomura have put out a series of research reports on the possible consequences of a Greek exit from the single currency – with this particular one looking at contagion effects and deposit dynamics. One positive note touched on by Nomura’s report is that a Greek exit from the eurozone is unlikely to have too much of an effect on eurozone nation’s trade – because Greece didn’t really do much trading with them to begin with.
The big effect on the rest of the eurozone is, of course, through the banks – though these are markedly lower than if the event had occurred two years ago.
All told, eurozone banks have $65bn in remaining exposures, mainly to Greek corporations. Within this figure, by far the biggest concentration is within French banks, which have $40bn in exposure according to end-2011 BIS data (see Figure 2). These exposures have partially been provisioned for (for the most important entities, provisions are likely to be in the region of 20% of the loan book). When thinking about potential hits from Greek exposures, it is worth considering the option of abandoning Greek businesses entirely to limit hits to equity at the head office level. Nevertheless, a Greek exit could generate significant additional charges for some important eurozone banks
It’s worth noting that the conventional wisdom that Greek eurozone exit would generate massive capital flight elsewhere in the eurozone is weaker than it has been in the past:
|In the past, it has been popular to argue that a Greek eurozone exit would generate uncontrollable capital flight, not only in Greece, but also in other eurozone countries with weak banking systems. But this thinking is currently shifting. Policymakers, including German policymakers, are starting to embrace the possibility of a Greek exit. The thinking is that sufficient fire-walls have been built such that the rest of the eurozone can manage a Greek exit. Time will tell whether this policy view is correct.|
And, unsurprisingly, the factors outlined above aren’t positive for the euro:
With this new risk looming, it seems likely that eurozone risk premia will continue to rise in the run-up to the second round of the Greek election, scheduled for June 17.
In relation to the euro, the risk premium is the dominant variable at this juncture, and we could well continue to trade lower as a result vs USD and JPY (other crosses are a different story).
Not that that should be news to anyone.