Wall Street Journal
May 8, 2012
What odds a Greek euro exit now? Citigroup says the chances have increased to 50%-75%, J.P. Morgan puts the probability at just under 50%. Yet markets appear pretty unruffled. Greek stocks have fallen 10% since Friday, but the Stoxx Europe 600 has fallen just 0.9%, Spanish and Italian bond yields have risen only modestly and the euro has merely wobbled. Are the markets being complacent? Or do investors simply no longer fear a Greek exit?
Of course, some tensions are priced in. Spanish bond yields may be relatively stable, but the 10-year spread over Germany has ballooned and is now 4.29 percentage points. German bund yields have collapsed to record lows. Equity investors arguably are also being cautious. Although European stocks are up 2.4% year-to-date, they are underperforming their U.S. peers, while Italian and Spanish equities are down 7.7% and 18.6%, respectively.
But the popular thinking around Greece rests on two assumptions. The first is that a euro exit isn't a near-term risk. True, Greece isn't yet at the moment of truth. There will be forbearance while the country remains without a government, and there may be some room for negotiation once a new government is in place. But ultimately, Greece's official lenders will find it politically difficult to budge on their demand for €11.5 billion ($15 billion) of austerity measures to be identified swiftly for 2013 and 2014. Greece's voters want to stay in the euro, but if Europe pulls the funding plug, Greece may have little choice but to leave.
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