Grexit to set a precedent – DB

FXStreet (Guatemala) – Analysts at Deutsche Bank AG explained that a potential lasting, material cost Grexit would do one thing for certain: it would destroy the argument that membership of the euro area must be considered permanent.

Key Quotes:

“The argument would go that neither the ESM nor the OMT nor QE are capable of guaranteeing that all member states remain member states.”

“Grexit would set a precedent: investors would have to assign a non-zero probability to redenomination (FX) risk for other weaker euro-area countries.This would call for higher risk premia at least during recessions – if not throughout the business cycle.”

“The flipside is that stronger countries could then benefit from an enhanced status as “safe-heaven” translating into lower yields. But would this be a zero sum game across the euro area? Probably not as (i) higher uncertainty should be a net outright negative for growth and (ii) the transmission of the monetary policy would be distorted leading to lower real interest rates in stronger countries and higher real rates in weaker countries.”

“Inflation pressure would build in the former group and too low inflation could worsen weaker countries’ challenges. Indeed, we think it would be an outright negative for the whole euro-area.’

“A destabilization of the monetary union would increase the risk of debt restructuring in weaker countries, contagion towards the stronger countries would be difficult to contain.”

“Investors could be justified for asking higher premia across the great majority, if not all, euro-area countries. In any case higher risk premia would imply lower growth.”

Analysts at Deutsche Bank AG explained that a potential lasting, material cost Grexit would do one thing for certain: it would destroy the argument that membership of the euro area must be considered permanent.

(Market News Provided by FXstreet)