A Greek exit from the eurozone would represent a step into ‘uncharted waters’, but eurozone policymakers are much better placed to contain the fallout than they were a few years ago, says AllianceBernstein (AB).
Greece is expected to default on its debt to the International Monetary Fund this morning and uncertainty remains about its ability to make later repayments to the European Central Bank (ECB).
Prime Minister Alexis Tsipras has called a referendum for Sunday 5 July to decide whether Greece should accept the tough terms of its creditors.
A ‘no’ vote would effectively be seen as a vote to leave the eurozone, while a ‘yes’ vote would put enormous pressure on Mr Tsipras to resign.
Both scenarios would see considerable instability in Greece.
But AB senior economist for Europe Darren Williams reckons eurozone policymakers have the tools to manage any fallout from a Greek exit.
"The rest of the euro area periphery is likely to come under pressure, but the region has the tools – in the form of the European Stability Mechanism, ECB quantitative easing and Outright Monetary Transactions – to prevent volatility from spiralling out of control," Mr Williams said.
"In our view, the ECB is willing and able to do just that. With the QE program in place, the central bank can calibrate its moves to address turbulent conditions, for example by adjusting the speed and composition of bond purchases as trouble spots arise.
"Indeed, the ECB said on June 28 that it was closely monitoring developments and was prepared to respond if necessary."
Greece has effectively been 'ring-fenced', with investors distinguishing between it and the rest of the peripheral eurozone countries, Mr Williams said.
"All this suggests that the authorities should be able to contain the spillover to other economies and markets more generally," he said.
"Still, we are conscious that a Greek exit would represent a step into uncharted territory, with unpredictable consequences. The outlook is therefore highly uncertain – but would be much more so if the ECB weren’t acting as a backstop."