What is the Likelihood of Greece Leaving the Eurozone, Really?

Predicting if and when Greece will leave the Eurozone has become somewhat like trying to predict the end of the world. Nobody can agree on when exactly it will happen, and the possibility is being pushed further and further into the future. However, this time policy-makers seem to be significantly concerned, with Mario Draghi stating that the global economy could enter "uncharted waters" if such a situation were to materialise.

With Greece under increasing pressure from the International Monetary Fund to pay its last €7.2 billion installment of the original €240 billion bailout deal, IMF chief Christine Lagarde has stated in no uncertain terms that no allowances would be made for any potential delays in the receipt of payment. However, the fact that the question of potential delays are being raised in the first place means - at least at some level – that there is an underlying fear that Greece may not be able to meet its debt obligations. The credit ratings agency Standard & Poor's has recently cut Greece's rating to CCC+/C, a level which reportedly puts Greece "at substantial risk of default".

There has been speculation that Greece would call for a potential restructuring of the debt – should Greece in fact be considering this – then this does raise the prospect of a default by a significant margin. In this regard, the coming weeks will invariably be critical in assessing the potential of such a scenario materialising. However, as time has gone on, it seems that the financial community has become less risk-averse to the prospect of a Greek exit. The IMF is not willing to make an exception for Greece in terms of timely debt repayments. While Mario Draghi is sceptical at the prospect of Greece leaving the Eurozone, even he concedes that leaders in Athens are "free to choose what they can do".

Should Greece leave the Eurozone, is contagion a significant threat to economic growth? I would argue that it is not. Firstly, the European financial system is in quite a different situation compared to 2012. For instance, European banks are not as exposed to Greek debt as they once were, and a restructuring would have had a greater impact on their balance sheets. Additionally, the subsequent implementation of the ECB backstop would likely limit any potential downside. In this regard, the wider European economy has taken measures to limit their exposure to Greece since 2012. While contagion and the possibility of bank runs remain should Greece exit the Eurozone, they are less likely to materialise.

In many ways, Greece has more to worry about should the country be forced to reinstate the drachma currency. Firstly, it is likely that a Greek central bank would simply not have the credibility of the ECB in combatting inflation. In this regard, the drachma would depreciate quite dramatically against the euro, and this in turn has the potential to trigger an internal bank run as Greeks attempt to protect the value of their Euros should the possibility of a default increase. Greek bank deposits are already at a 10-year low, and this scenario would be exacerbated should default become a realistic possibility.

Should this materialise, I do not see contagion spreading outside of Greece. Other peripheral countries such as Spain, Portugal and Ireland have shown significantly higher GDP growth rates than Greece, and a bank run in Greece would likely even bring greater cohesion across Eurozone countries. With continuing GDP growth across the Eurozone, members will be keen to avoid Greece's fate and would simply be shooting themselves in the foot by attempting to abandon the Euro.

To conclude, the coming weeks are crucial in determining if the prospect of a call for debt restructuring is material or simply hearsay. While financial markets are uncertain on this point at present, any indications that Greece will request a delay on its repayments will likely trigger concern and make a Greek exit a realistic possibility.

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