Let's not fool ourselves: An exit of Greece from the eurozone is not without risks

Even though the contagion risks are not as big as some years ago, an exit of Greece from the euro is not without risk. The truth is that nobody is in a position to predict with any certainty how capital markets would react to a ‘Grexit.’

True, the risks have diminished since ECB president Mario Draghi vowed to do “whatever it takes” to keep the eurozone together. But let’s not fool ourselves: there remain both political and fiscal risks.

A ‘Grexit’ might further strengthen anti-euro forces throughout Europe – with grave consequences for the future of the single currency.

And despite Draghi’s promise, it is still possible that in case of a ‘Grexit’ capital markets will again start to price in a foreign exchange rate risk when handing out loans to euro states, because they will act on the assumption that other euro states might also reintroduce a national currency. This would drive up the refinancing costs of these states and burden public coffers. Especially Cyprus could be targeted, given its close economic relations with Greece.

Moreover, Greece would most likely default on part of the loans handed to the country under the financial aid programs from its eurozone peers. This would also strain public finances from the countries which granted the loans to Greece.

Finally, the ECB would have to forego on claims against Greece which result from Target liabilities and the purchase of Greek government bonds. The member states might even be forced to recapitalize the central bank, which will, in turn, further hurt their public finances.

Dr. Matthias Kullas, Head of Economic and Stability Policy Division, kullas@cep.eu