S&P’s Late Call on Greece and the Eurozone

Very many experts on international finance and the politics of the eurozone expect Greece to leave the alliance. Some believe that the nation’s gross domestic product, debt and unemployment problems cannot be solved by serial bailouts. Others believe that Greece’s neighbors think that money put into the nation will be poorly used to close its deficit gap.

S&P, late as it often is to render important forecasts on important subjects, offered the opinion yesterday that:

We believe there is at least a one-in-three chance of Greece exiting the eurozone in the coming months, following national elections on June 17. This could be brought about by Greece rejecting the reforms demanded by the troika — the European Commission, International Monetary Fund (IMF), and European Central Bank (ECB) — and a consequent suspension of external financial support. Such an outcome would, in our view, seriously damage Greece’s economy and fiscal position in the medium term and most likely lead to another Greek sovereign default.

It is already clear that without outside money, Greece has no hope of paying its debt. The issue of a sovereign default is already anticipated if the nation rejects the terms of its current aid. The Greek government and economy would enter a period of anarchy as the euro is replaced by the drachma, the value of which may fluctuate widely. Greece will be unable to turn to the world for financial aid. The nation will collapse into a deep depression.

S&P also said that:

European policymakers would be keen to demonstrate that Greece is a special case. We would expect growing financial support and leniency in the face of slipping targets for other sovereigns embroiled in the debt crisis. Accordingly, we currently do not consider that a Greek withdrawal would automatically have any permanently negative consequences for other peripheral sovereigns’ prospects of continuing eurozone membership.

This presupposes that the balance of the EU and the IMF have the ability to prove they can adequately support deep financial troubles in Spain, Portugal and perhaps Italy. In addition, some of the banks in that nations will need billions of euros in new capital.

S&P is very late to the debate of the future of Europe’s finances.

Douglas A. McIntyre