Greece makes up only 2% of the Eurozone economy. But the fallout from a Grexit, or Greece’s exit from the Eurozone, could rise to mythic proportions, especially if it occurs simultaneously with the collapse of the Chinese bull market (FXI).
The first and primary consequence of a Grexit would be default. Greece would default on its loans to the ECB (European Central Bank), the IMF (International Monetary Fund), and the Eurozone. This is certainly cause for alarm, but the possibility of contagion looks muted. Fears of a contagion have been allayed, since it’s largely believed that the exposure of countries to Greek debt is now much lower than it was three years ago.
The above graph shows Greece’s leading creditors. Germany (EWG) and France (EWQ) have the most exposure at 68.2 billion euros and 43.8 billion euros, respectively. Although these figures look massive in absolute terms, the exposure looks manageable when viewed as a proportion of their GDPs (gross domestic products). The real danger would be to peripheral nations like the Balkan States, which have exposures to Greece debt amounting to 4%–5% of their GDPs.
There would also be political ramifications to a Grexit. The identity of the Eurozone was based on its irrevocable nature. A Grexit would question that premise. The euro would likely take a further beating if a Grexit materializes. In this scenario, parity between the euro and the US dollar (UUP) might be in the cards.
Anti-austerity parties have been gaining favor in various parts of Europe like Spain and Italy. A Grexit might stimulate these movements further and set the wrong precedent.
Geopolitical tensions might escalate if Greece were to exit the Eurozone. Greece might try to find allies in Russia (RSX) and China. Greece is already planning a gas pipeline worth 2 billion euros in collaboration with Russia. Closer ties with Russia could be troublesome for the Eurozone in the future.
So how would a Grexit actually play out? Greece can’t be forced out of the Eurozone through any legal proceedings. A Grexit would happen when the failure of the Greek banking system forces the nation to abandon the euro.
Greek banks have escaped insolvency so far through the help of the ECB’s funding scheme. If no bailout deal is achieved, the funding lifeline would be cut, and banks would have to repay the ECB for these loans. This is an almost impossible feat. Greece’s only option would then be to abandon the euro and adopt an alternate currency, which the central bank would then proceed to print.