Early this year, we predicted that 2012 would see Greece leave the Euro but ultimately lead to a golden buying opportunity in European equities. We still think this. Why are we so sanguine?
The Greek austerity plan, which sees Greece enduring eight years of pain in order to win the prize of Italian levels of indebtedness (at best), is neither politically nor economically credible. Markets have known this all along and it has embedded a fear of eventual contagion which has hobbled the bank sector and discouraged investment.
At last the nettle can be grasped.
A “Grexit” would be turbulent but most private sector financial institutions have already cut their direct Greek exposure to negligible levels. Of course, there is the potential domino effect. However, the fiscal positions of Italy and Spain are poles apart from that of Greece and once reason prevails markets should come to recognise this. Italy has high debt but is now running a primary budget surplus, whereas Spain is reducing its deficit and does not have unduly high levels of debt.
Therefore it is a matter of confidence more than economics. This missing ingredient must be provided by policy response.
We expect a Greek exit to galvanize the authorities to embrace the sort of concerted policy action for which the markets have been crying out, with a more reflationary element than hitherto.
Ironically, rather than pulling the Eurozone apart, the crisis might pull it together. With the contagion boil finally lanced, Europe could start to look forward to some better times.