Oh yeah..... Greece.
As already pointed out, first we had Fitch and then various European ladies and gentlemen, all lining up one after another, to talk down the event that as recently as 4 months ago would presage the apocalypse of Europe: i.e., Grexit, or the country's exit from the Eurozone. And now that a second Greek elections is inevitable (as we expected a week ago), and with Syriza likely to surpass 30% of the vote alone in the next two weeks, all hope appears to be lost for preserving Greece in the EMU. Europe's reaction? Why talk it down of course.
German Finance Minister Wolfgang Schaeuble suggested the euro area could handle Greece dropping out, raising pressure on Greek political leaders struggling to form a government amid a rise in anti-bailout sentiment.
“We have learned a lot in the last two years and built in protective mechanisms,” Schaeuble told the Rheinische Post newspaper in an interview published today, when asked whether the euro area is girded for a Greek exit. His comments were confirmed by the Finance Ministry in Berlin.
“The risks of contagion for other countries of the euro zone have been reduced and the euro zone as a whole has become more resistant,” Schaeuble said. “The notion that we wouldn’t be able to react in a short time to something unforeseen is wrong.”
“The future of Greece in the euro zone now lies in Greece’s hands,” German Foreign Minister Guido Westerwelle said in a speech in the lower house of parliament in Berlin today. “Solidarity is not a one-way street” and aid to Greece can only be disbursed if Greece sticks to its part of the deal.
“We have to tell our Greek friends and partners honestly, fairly and openly that there is no way other than the one we jointly agreed,” Schaeuble said. Other European governments and private investors have gone “extraordinarily far” in making concessions, so Greece “has to understand that must fulfill its commitments in return.”
A Greek exit from the euro zone would be catastrophic not just for Greece, the head of the euro zone's temporary rescue fund said on Monday, a day after pro-bailout ruling parties lost their majority in parliament in Athens.
If Greece exited the euro zone that would "of course have a huge impact not just for other program countries, not just for the banks, but also for Greece itself," Regling said, adding Greece's public creditors would also suffer. "It would be a catastrophe for Greece."
Regling also said it was completely out of the question that the European Stability Mechanism (ESM) would directly recapitalize banks, a proposal by some policymakers to help Spanish banks.
We are confused: Greek exit - good or bad? Or should we just wait for the post-fact CNBC spin. In the meantime, just out from Fitch, the stakes get raised:
Fitch Likely to Put Member States on Rwn If Greece Leaves Emu
The inconclusive outcome of Greece's May 6 parliamentary elections and the subsequent failure to form a coalition government make fresh elections in June probable. The election or formation of a Greek government unwilling or unable to abide by the terms of the current EU-IMF programme would increase the risk of Greece leaving the eurozone. If they are required, the re-run elections will therefore be a critical event for both Greece and for the eurozone.
The implications for the eurozone of a Greek exit are highly uncertain and would depend on how it happens and the European policy response.
In the event of Greece leaving EMU, either as a result of the current political crisis or at a later date as the economy fails to stabilise, Fitch would likely place the sovereign ratings of all the remaining euro area member states on Rating Watch Negative (RWN) as it re-assessed the systemic and country-specific implications of a Greek exit.
This would be in line with the approach set out in Fitch's report, 'The Future of the Eurozone: Alternative Scenarios". In the report, published 3 May, we said that if Greece left the eurozone, the ratings of those sovereigns currently on Negative Outlook - Cyprus, France, Ireland, Italy, Portugal, Spain, Slovenia and Belgium - would be at most immediate risk of a downgrade. The probability and magnitude of this would largely depend on the European policy response and its success in limiting contagion, as well as outlining a credible vision of a reformed EMU. Nonetheless, the sovereign ratings of all eurozone member states would potentially be at risk.
A Greek exit would break a fundamental tenet underpinning the euro - that membership of EMU is irrevocable. In a benign scenario, the spill-over and contagion to the rest of the eurozone could be less profound than feared and possibly provide the catalyst for greater fiscal and political integration that would strengthen the viability of Economic and Monetary Union.
The May 6 vote in Greece saw a rise in support for explicitly anti-austerity (although not necessarily anti-euro membership) parties, such as the left-wing Syriza, which rejects the terms of Greece's EU-IMF programme. This came at the expense of the incumbent Pasok-New Democracy coalition, which fell two seats short of a parliamentary majority.
The outcome of re-run general election is unpredictable as the choice facing the Greek electorate is between parties that would implement highly unpopular fiscal austerity and structural reforms, and those political forces that reject the EU-IMF programme and would put at risk Greece's membership of the eurozone. The May 6 poll and probable need for a second election have underlined the growing political risks to the successful implementation of the EU-IMF programme and financial support for Greece.
In the near-term, new elections in June would make it doubtful that Greece could comply with the EU-IMF's end-June deadline to propose further medium-term austerity measures worth 5.5% of GDP, although we would expect Greece to be granted an extension to that deadline. However, we think any attempt by Greece to significantly renegotiate its agreed consolidation and reform programme (to which both Pasok and New Democracy are committed) would be unacceptable to the Troika of the ECB, Eurogroup and IMF, who appear unwilling to countenance a significant easing of the programme or any increase in funding.
Greece's Long-Term foreign currency and local currency Issuer Default Ratings were moved to 'B-'/Stable from 'RD' on 13 March 2012 following the completion of the distressed debt exchange that facilitated the provision of the country's new EU-IMF programme.