Greek exit from the euro ‘more likely than not’

Greeks go to the polls again on June 17 to elect a new government, having failed to agree on a clear winner in May. The outcome will be crucial in determining the fate of Greece’s membership in the euro, so we asked our readers last week about the chances of a return to the drachma during 2012.

More than half the respondents were confident that a so-called Grexit would happen before the year is out, which suggests little confidence in Greek voters’ willingness to make the sacrifices needed to stay in the euro. But, as CLSA reported in a recent study, Greece has little to gain from exiting the currency union, especially if it also has to quit the EU.

The different paths chosen by governments during the Asian crisis showed one thing very clearly: there is no easy way to rebalance a large current account deficit. Abandoning the euro will not fix Greece’s problems, and could very easily make them much worse.

As Malaysia has experienced since 1997, economic isolation is a poor way to create growth.

Despite such evidence, the inevitability of a Greek exit is routinely trumpeted in the media these days. How would further turmoil in Europe affect Asia? It clearly would not be good. The EU is China’s biggest trading partner and the adjustments needed to return to economic health suggest a steep drop in imports within the peripheral countries.

Another issue since the start of the crisis has been the withdrawal of European lenders from the region. The banking crisis in Spain is far from being resolved, despite a rather vague bailout that was announced during the weekend, and further contagion is likely to lead to continued reductions in European loan books in Asia.

Even so, Asia has plenty of domestic liquidity these days, with local bond markets picking up the slack, and the region’s banks are also well capitalised since their own crisis. A breakup of the euro would clearly be a big shock to the system, with unavoidable consequences for global markets, but Asia may be able to weather the storm.

And it is worth noting that a fair chunk of our readers reckoned there was no chance that Greece would leave the euro this year — and more than a quarter said it was only “an outside possibility”.

We await developments with interest.