Greece euro exit to hit Spain and Italy hardest – experts
“The important thing is not Greece itself: it’s relatively small and the investments in Greece are already written down by most banks. But the potential contagious effect on Italy and especially Spain – this is a real danger,” Bachurin said.
Indeed, as the Greek crisis entered a new phase with the country’s party leaders failing to form a government, Italian and Spanish borrowing costs surged and banking declined.
Late on Monday, Moody’s rating agency downgraded the debt rating of 26 Italian banks, including giants UniCredit and Intesa Sanpaolo. Ten of them were lowered to so-called junk status, while some saw their ratings cut by as much as four notches. Meanwhile, Spain announced a consolidation of four major banks aimed at creating a lender with assets of 270 billion euro.
Though some European politicians insist the eurozone would survive even without Greece, some economists say it might be the end of the game. The deterioration in Greece could result in “huge withdrawals from Spanish and Italian banks, as depositors try to move their money to Germany,” Paul Krugman, renowned US economist, wrote in his column in the New York Times.
In this case Germany would be left with two options, according to Krugman. The first would be to “accept huge indirect public claims on Italy and Spain, plus a drastic revision of strategy.”
“To give Spain in particular any hope you need both guarantees on its debt to hold borrowing costs down, and a higher eurozone inflation target to make relative price adjustment possible,” the expert says.
The second would be – to give up the euro.
Meanwhile not everyone is so pessimistic on the euro’s future. Banks across Europe are already preparing for the possibility of Greece’s exit, discussing probable legal and practical problems with a possible return of the drachma, but a total return to national currencies is not, it seems, on the agenda.