With no deal on the cards, would the Eurozone be able to contain contagion from Greek exit?

Talks with Greece's creditors have reached sticking points (Source: Getty)

Dr Holger Schmieding, chief economist at Berenberg, says Yes.

The Eurozone won’t let the turmoil of 2011-2012 happen again. It has spent the last three years strengthening its defences against contagion risks. Systemic contagion through sovereign bond markets is now highly unlikely. Investors know that the European Central Bank is the reliable buyer of last resort.

If need be, the ECB could step up its current bond purchases massively by activating its Outright Monetary Transactions (OMT) programme, living up to the promise to do all it takes to keep all countries in the euro that meet the required conditions. There is no contagion risk through the banking system. Few banks outside Greece are still exposed to Greek risk. And with banking union, the Eurozone can deal with isolated banking problems easily.

The Greek case also provides a sobering example of the damage that populists can do once in power. The risk that voters elsewhere would want to follow the Greek example and vote Syriza-type radicals into power looks very small.

Jessica Hinds, European economist at Capital Economics, says No.

Although the risks of Greece exiting the Eurozone appear to be growing by the day, contagion effects in the financial markets have so far been limited. There is some justification for this given the reduction in banks’ exposure to Greece, the improvement in other peripheral countries such as Spain, and the policy buffers now in place, notably the ECB’s QE and OMT programmes.

However, these factors are unlikely to be sufficient to prevent contagion. For a start, a Greek exit would prove that it is feasible to leave, not only damaging confidence in the region but also raising the possibility that others could follow. Further, Greece is not alone in having an excessive debt burden – in particular, its departure could throw the spotlight on Italy.

Finally, the policy tools that have been introduced have not been tested. Indeed, it is doubtful that OMTs would have sufficient firepower to suppress potential contagion to the much larger economies of Italy and Spain.

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