While the direct impact of a Greek exit from the euro would be manageable, it also poses larger risks to confidence and bond markets, says Moody’s Investors Service.
In a new report, the rating agency says that it still expects Greece to reach an agreement with its creditors and to avoid a sovereign default. However, given the lack of progress toward a deal, it also allows the risk of default, and a subsequent exit from the euro, is rising.
Should that occur, Moody’s says that the direct economic and financial impact of would be small. However, it also says that an exit would undermine the euro area’s longer-term resilience somewhat, and could trigger a more immediate confidence shock, disrupting government debt markets.
“The impact of a Greek exit should not be underestimated,” says Alastair Wilson, managing director at Moody’s. “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 risk of a bond market disruption is lower than it was back in 2012, Moody’s says; partly because the euro area financial system and economy are in a stronger position than there were three years ago. Policymakers’ response to exit would determine the extent of any contagion, the report suggests.
For now though, the report notes that neither the Greek government, nor the Greek electorate, appear to view an exit as desirable. And, it says that policymakers in the euro area also have an incentive to avoid a Greek exit because of both the precedent it would set, and because it would crystallize losses to euro area authorities from loans to Greece.