The euro area is in a better position to handle Greece’s potential exit than it was a few years ago and has the monetary tools to prevent financial market volatility from spiraling out of control, according to global asset manager AB.
Ahead of an expected June 30 default by the country on its debt obligations to the International Monetary Fund, and uncertainty about repayments to the European Central Bank (ECB), AB’s Senior Economist—Europe, Darren Williams, noted that the priorities of Greece’s creditors and other euro- area countries had switched to containing the fallout.
“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 spiraling out of control,” said Williams.
“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.”
While Greece’s potential exit from the euro area would represent a stiffer challenge than debt default, the region is better placed to handle such an event than it was a few years ago—not only because of the financial firewalls in place, but also because the economy is stronger, said Williams.
He added that Greece had been “ring-fenced”, with investors increasingly distinguishing between it and the rest of the periphery.
“All this suggests that the authorities should be able to contain the spillover to other economies and markets more generally. 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.”
Source: Financial & Corporate Relations (FCR)
