How likely is a Grexit?

I can't remember how many times the market has screamed "wolf! wolf!" when referring to a Grexit, during the last 3 years.  But ever since Syriza party got over the government, the risk of a Greece default not only has become real, but grew exponentially. 

The new government has quite a naïve view of the economic world where it stands, as PM Tsipras has steadily worked unilaterally to dismantle the austerity measures imposed by the Troika, in order to be eligible for bail-outs. Tsipras has blamed its creditors for plunging the country into a deep recession and destroying living standards.  The government called for a halt to the privatization program, hiked the minimum wage by 10% to about €750 per month from about €680, and, on March 18, the Greek parliament approved a package of social measures to revert the austerity ones imposed by its creditors, offering food stamps and free electricity to the very poorest, worth around €200m.

In the meantime, countless chapters have been written about the tensions  between Germany and Greece, as the first is not willing to keep feeding Greece if the country does not return to austerity. German Finance Minister Wolfgang Schaeuble  warned several times that an agreement between Athens and its creditors was unlikely to happen during the last weeks, but last Wednesday he took one more step , and said directly that "nobody expects that there will be a solution.” ECB's President Mario Draghi was not willing to discuss a Grexit in this week Central Bank's meeting, and said that the ECB policymakers approved increasing emergency funding for Greek banks to as much as €80 billion.

Also this week, the ratings agency S&P has downgraded Greece's credit rating dropping long and short-term sovereign credit ratings deeper into junk, to CCC+/C from B-/B and said its outlook is negative.

Next May, the Syriza government is due to pay the International Monetary Fund (IMF) about €1 billion, and Christine Lagarde, the head of the International Monetary Fund, said the institution would not give the country any leeway on its debt repayments.

Greek government bonds climbed to the highest since December 2012, having touched 13.20% in early trading on Friday, as the market believes Greece will be unable to repay its debt in five years, whilst the domino effect affected other peripheral bond markets as Portuguese, Italian and Spanish yields also rose this week.

Yanis Varoufakis, finance minister in the Syriza party-led government said Thursday that the country is desperately short of funds, accusing its  creditors of being responsible of submitting the country to a "liquidity asphyxiation." 

Effects of a Grexit

For most of this year, German authorities have been pointing out that a Grexit would have its stronger effect just in the troubled country, and be a minor issue for the rest of the Euro zone. But this seems quite an optimistic stance. Should Greece leave the union, the greatest immediate risk is a possible default contagion particularly amongst other peripheral countries.  Political unrest, inflation, uncertainty, but overall distrust will reign among investors, and European shares and assets would slump, catching speculators wrong-footed.  The EUR will devaluate sharply, which once the chaos passes, will make it more competitive for local exports, but no doubts, it will take months, if not years, for Europe to recover.

Last Wednesday in the middle of the ECB's meeting, Mario Draghi said that the current exposure to Greece is of €110 billion, so the question today is not if Greece will leave Europe, but if Europe is willing and able, to lose that and the world's trust on the union.  My personal take is that Europe can't afford a Grexit, and despite the tough talk, the ECB will keep on feeding the beast, for the greater good.