PARIS (MNI) – Are the dangers of a Greek exit from the Eurozone as
minimal as some policymakers now claim?

Riding the wave of liquidity supplied by the European Central Bank,
Greece’s Eurozone partners have become increasingly confident that a
Greek default or exit could be easily absorbed. And much of northern
Europe now appears ready to cut Athens adrift.

Dutch Finance Minister Jan Kees de Jager said Thursday that the
risk Greece poses to the Eurozone has “decreased significantly,”
suggesting that Eurogroup finance chiefs could indeed decide to delay a
rescue package until after Greece’s April elections.

Similar comments are now heard almost daily in finance ministries
from Luxembourg to Finland. As Germany’s Economy Minister Philipp
Roesler said in a television interview on Sunday, the “Day X” of a Greek
Eurozone exit “has lost much of its terror.”

And in a certain sense they are right. European banks have reduced
their cross-border exposures to Greece and sharply written down the
value of the Greek bonds they still hold. The banks’ wholesale funding
risk has been removed by the ECB. And Italy and Spain have shown no
recent signs of contagion from Greece; their bond yields have retreated
substantially even as Greece has lumbered toward default.

But too much optimism can be a dangerous game in financial markets,
as Lehman’s collapse showed in 2008.

Prior to Lehman, for example, spreads on European government bonds
were minimal. Investors perceived little credit risk between Rome or
Madrid or Athens, whose bonds traded at yields not much different from
German bunds.

As Lehman woke the world up to credit risk, could a Greek default
or euro exit wake the world up to Eurozone exchange rate risk? If Greece
exits the single currency, would markets attach a premium to financing
Portugal because of fears it might one day revert to the escudo? Might
bank deposits flee countries whose debt is deemed to be unsustainable.

As ECB executive board member Joerg Asmussen said this week, a
Greek exit or default would present “incalculable” risks for financial
stability. It would be the kind of leap into the unknown that German
Chancellor Angela Merkel has worked so hard to avoid.

If the point of putting increasing pressure on Greece is to help it
reform rather than push it out of the Eurozone, policymakers may be
overplaying their hand, says Gabriel Sterne, a former Bank of England
and IMF official, who is now with the fixed-income firm Exotix in
London.

Greece, he points out, is quickly getting to the point where the
pain of staying in the Eurozone is becoming equal to the pain of leaving
it. “It’s not obvious to me whether default or exit is any worse than
staying in,” he said.

If after the April elections Greece’s new leader makes the same
calculation and realizes that his entire mandate will be one of
unrelieved depression, leaving may prove to be an attractive option.

And then the Eurozone’s complacency about contagion could be truly
tested.

–Paris newsroom, +33142715540; jduffy@marketnews.com

**(EuroView is an occasional column written by Market News
International editorial staff. Any views expressed are solely those of
the writer)

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