Although Greece is a relatively small country, its exit from the euro-zone could precipitate the destruction of the monetary union. Under such circumstances the European debt markets could suffer severe collateral damage.
“There is no provision in the European treaties for countries to leave. Grexit would demonstrate that the monetary union was not irrevocable,” says Tony Stringer, managing director of global sovereigns and supranationals at Fitch Ratings.
Such a development would set a dangerous precedent. Maria Paola Toschi, global market strategist at JP Morgan Asset Management, points out: “It would make other countries consider a possible exit. Spain and Italy have been forced to introduce painful structural reforms. If this political impact were not so important, the process of Grexit would have begun some time ago.”
As Standard & Poor’s (S&P) states in a recent note: “We believe that such an outcome could reduce the European Central Bank’s ability to conduct effective and independent monetary policy. It would also indicate the ECB would have been powerless to prevent a reversal of the monetary integration process in Europe.”
While a Grexit would be a seismic event, the rest of the euro-zone is today in a better shape to cope with it than in 2012, says Stringer. But the ramifications for the rating framework of sovereigns in the euro-zone could still be profound. Stringer says Fitch looks at four key areas that could be hit in its sovereign credit analysis – the public finances, external finances, the economy and structural features.
“There is no provision in the European treaties for countries to leave. Grexit would demonstrate that the monetary union was not irrevocable”
“Rating implications of other sovereigns post-Grexit would then depend on a range of factors,” says Stringer. These would include the availability and cost of funding and the policy response at both the national, and euro-zone institutional levels to the shock.
S&P follows a similar approach to its fellow rating agency. It is therefore not surprising that both argue that a Greek exit would affect their assessment of the ECB.
When a sovereign joins a monetary union such as the euro-zone it cedes monetary and exchange-rate policy to a common central bank. As a result, S&P, for example, applies a negative adjustment to reflect the lack of flexibility compared with countries that retain their monetary sovereignty. It sees central banks within monetary union as designing monetary policy for the benefit of the region as a whole rather than individual member states.
“[A Greek exit] would make other countries consider a possible exit. Spain and Italy have been forced to introduce painful structural reforms”
Maria Paola Toschi
S&P argues that in the case of the euro-zone the ECB’s large quantitative easing programme illustrates that it can and will use its significant monetary powers to achieve its objectives and thus bolster its credibility. But the agency also states explicitly that it could change its rating, currently at its highest level, of the ECB’s “monetary policy credibility and effectiveness and inflation trends” should one or more euro-zone members leave. “Such a reassessment would likely lead to negative rating actions on some euro-zone sovereigns as well as on the ECB itself.”