I wrote about Greece on this blog many times. From the beginning my view was that unless 80% of the Greek debt is forgiven financial markets will bring out the weakness in the Greek economy and the euro area design. Also, I said that until a solution imposed by EU policy makers would not resemble one that would have been imposed by the markets the Greek story will continue. The same is true for the others in the PIIGS group.
When it comes to this type of analysis you will get two views: what the analysts thinks it should happen and what the analysts think it will happen.
I am going for the second type of analysis as this is the one that mattes for all of us and especially for investors. In my view Greece will not exit the euro at this point. Although the EU leaders have changed their speech a little bit I am sure that they are not speaking to the financial markets but to the Greek people when they say they are ok with a Greece exit. They are not ok. First of all the timing is terrible. An exit of Greece prompted by the financial markets will push the markets to overshoot the impact of such a decision. If there will ever be an exit from the euro area it will be done when the framework of the euro zone would have been changed to allow for such an exit. Otherwise the precedent started by an exist of a country due to financial markets pressure will not be contained by EU leaders and next we will face the possibility of three or four more countries asked to either reform fast or exit. This is in fact the main risk for the euro zone: total break up not just losing Greece.
Thus, I do not believe that Greece will exit soon the euro zone. However, there is a sector that will suffer in the short term either way. For Greece to stay in and have a future more of the debt will have to be cut. This means that the banking sector, the very same institutions that have been funding Greece even at a rating of “junk”, will have to book more losses. But this would have happened even if Greece will exit the euro zone tomorrow. Banks will have to write off their claim (or most of it) on Greece in either scenario.
Going back to 2008 what would have been the market solution then for those institutions that made bad investments and stretched way beyond their funding means? Bankruptcy or massive restructuring. 4 years later and 20% extra public debt/GDP for the euro zone and we will get the same result: restructuring in the financial sector (mostly banking).
P.S. More detailed implication are presented in a report for my clients.