Crucial time for the survival of the Eurozone - Business

Crucial time for the survival of the Eurozone

August 17, 2012 – We may witness many important Euro zone events in September 2012, which will determine the region’s future. The German constitutional court will vote on the fiscal pact and the ESM, a general election will be held in the Netherlands. It is also the month when the Troika will review Greece’s bailout program, which in an extreme case might even lead to the country’s default and a subsequent exit from the Euro zone.

The talk of a possible Grexit has been intensifying again of late, due to reports of Greece having problems with fulfilling the aid conditions imposed by the EU and the IMF. Therefore, many Eurozone countries began pricing in a possible secession. According to a report prepared by the ING, in which they evaluate the exposure of core EU countries to the periphery, “the total official and banking sector exposure would be €2.2tn, or 36% of core country GDP.”

In case of a Grexit, contagion would spill into other periphery countries such as Spain or Portugal. In the opinion of ING experts “after Greece, other peripheral countries might be forced to follow suit” and “the potential balance sheet losses to the core Eurozone countries of a wider exit of peripheral countries would clearly dwarf those in case of a Greek only exit.”

Bringing down the costs of keeping the core Eurozone countries intact, should it be hit by a wave of recessions, falls within the authority of EU leaders and the ECB. According to ING experts: “If policy moves into a more credible road to survival, then the evidently rising cost of sustaining EMU could start to stabilize, and even fall. The most immediate way in which this could happen is a reversal of the capital flight from the periphery. This could be triggered by quantitative easing or concrete steps towards banking union or common bonds. The last could prompt a huge ‘survival trade’ into peripheral government debt.”

While economists debate whether a Greek exit — or “Grexit” — would ultimately be a good thing for both Greece and the euro zone’s remaining 16 members, uncertainty and the prospect for chaos are more likely to trigger another round of turmoil across global markets in the short run, strategists said.