What’s At Stake If Greece Exits Eurozone

Greece is putting to a vote Sunday whether the country should abide by the European Central Bank’s and the International Monetary Fund’s demands in order to get additional funding it needs to honor debt payments. At heart, the vote is on austerity measures, but a “no” would put Greece on its path to exit the eurozone, according to geopolitical think tank Stratfor.

Over the weekend, when negotiations between Greece and its lenders broke down, people in Greece rushed to ATMs to take out as many euros as they could, adding to “billions of euros in capital flight since the beginning of the year,” Stratfor said.

“Even if the Greek government plans to continue negotiating with its creditors, the referendum creates significant uncertainty in Greece and capital controls will be difficult to avoid,” Stratfor said in a research note Monday, noting that the upcoming referendum could mark the beginning of Greece's exit from the eurozone.

How that exit takes shape—if it happens—is still unclear, but economists and market experts are already weighing in. Here are excerpts from two views shared in blog posts this week on what’s at stake:

Mark Dow, founder of Dow Global Advisors, author of the Behavioral Macro blog:

How bad would Grexit be? There’s a lot we can’t know. But there’s also a lot we do know, and pretty much all of it has changed for the better.

We’re more psychologically prepared than we were in 2010. Like with the Greek default, after talking about the prospect of Grexit for a long time, we become somewhat desensitized to the event. In markets, expectations at t-zero are hugely important.

We’re more financially prepared. There were no firewalls in place three years ago. We’re more economically prepared. Growth is still the Achilles heel of the eurozone, but Ireland and Portugal have made decent progress under programs, and even Spain has started to bob back to the surface. It’s not great, but it is better. Globally, the U.S. and Japan are in a much better place, and China has repeatedly confounded the doomsayers with its own brand of muddling through.

Greece, with its own currency, would finally get a path to growth. The confidence that things will get better makes even great sacrifice manageable. The eurozone would emerge stronger. The heartless truth is Greece adds very little to the eurozone and has subtracted a lot.

Having a template for leaving the euro is a good thing, not a bad one. “Learning by doing” would prove a huge help should another country decide/need to leave in the future. Of course, long-term risk premia would likely rise for certain borrowers. But is that really a bad thing as long as the ECB ensures it’s orderly? Rates are low in absolute terms, and the real constraint to lending has had more to do with balance sheets and growth prospects than the price of money.

When I look at Grexit I see a world in a much better fundamental position to avoid the cascading systemic contagion we (rightly) feared as recently as a year ago. Now is the time to do what the system could not handle in 2010: get Greece off the toxic medication and onto a path of growth and dignity.

Steve Blumenthal, founder and CEO of CMG Capital Management Group, and an avid tactical investor:

Greece is about the size of West Virginia. It’s small on a geographic basis, but the issues are much bigger. Greece is not the only eurozone member out over its skis in debt and dealing with pension promises—lack of funding—that can’t be met.

They will and have to default. I believe the systematic risk is that they will soon be followed by other member countries. France is a mess, as are most of the other southern eurozone members. I worry about the pile-on effect. The economies are being choked. Default is coming. The banks own the bonds. The hidden risk may exist in the intricate web of derivative-related counterparty risk—bank to bank.

One may have properly hedged its Greek debt holdings, yet that means nothing if your counterparty defaults and can’t pay you your gain. It’s a rolling Lehman-like moment across the eurozone and the rest of the globe. Our banks do a great deal of business with EU banks. Recall the structured mortgage junk we sold to them prior to the last crisis. As my daughter says, “karma’s a bitch.”

Overall, I believe the key will be interest rates. As they rise, the deficits will rise, the need for taxes will spiral even higher, and that is when a large bank or two gets caught offsides. That is when we’ll find out just what kind of counterparty risk exists.

There is $682 trillion in over-the-counter Derivatives Notional Amount (2014 per BIS). To add perspective to the $682 trillion of derivative leverage in the system today, total notional derivative exposure was $72 trillion in 1998. (Courtesy of Elliot Paul Singer via Zero Hedge.) I simply say, “yikes!” Put a plan in place that manages your personal risk exposure and remember that it never feels risky when markets are up, and it always feels risky when markets are in crisis.