Why the risk of Gexit contagion to other Eurozone members is lower now than in 2012

 
Emma Haslett
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The impact of a Grexit on Greece's Eurozone neighbours would be "moderate", says S&P (Source: Getty)

As Eurozone leaders decide whether or not to grant Greece's request for an extension to its bailout loan, ratings agency Standard & Poor's (S&P) has suggested a Greek exit from the Eurozone would present a lower a risk of contagion to other Eurozone economies than it did in 2012.

In a report published today, the ratings agency reckons that because the Eurozone's "rescue architecture" is more robust than during the last scare in 2012, the risk of other Eurozone members being driven out of the euro by contagion from the Grexit is much lower.

The report gives three reasons for that:

1. Europe has a stronger rescue mechanism

The introduction of the European Stability Mechanism (ESM), and the ensuing success of Ireland and Portugal's austerity programmes, has encouraged governments to keep ploughing money into the scheme.

2. Banks' exposure to Greek lenders has plummeted

It also suggests Greece's links with financial markets have been "sufficiently reduced to make such a direct contagion less likely". That's because global banks' exposure to Greek financial institutions has fallen from $250bn in 2009, to just $77bn in September last year, according to the Bank for International Settlements.

3. Investors no longer associate Greece with other periphery members

Finally, the difference between Greek sovereign bond yields and those of other Eurozone countries is a sign investors consider the redenomination risk of Greece's peers is "currently low". In other words, although the yields of Greek bonds have risen in recent months, those of its fellow PIGS - Portugal, Ireland, Spain - are at record lows. Last time around, the the bond yields of PIGS "tended to move in tandem".

Or, as S&P credit analyst Moritz Kraemer put it: "We believe that the financial burden of a Grexit on the remaining 18 Eurozone sovereigns would be moderate and absorbed over decades, and we therefore do not expect that a Grexit, by itself, would have significant rating implications for these sovereigns."
Which, if Eurozone leaders can't reach an agreement today, should provide some encouragement to investors.

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