- The situation is fluid. But, while our base case has been Greece remains in the euro (partly because of the pitfalls of exit & incentive of QE), a long-term debt restructuring looks inevitable & desirable.
- Done well, it could allow Greece to lock into current low funding costs. It would reduce uncertainty, & put the onus on meeting its primary-surplus targets more via growth than austerity.
- But, with Greece’s referendum offering impasse or fresh elections, an early agreement looks unlikely. Coping with the strains outside the euro would be even harder for Greece in the short term.
- With only one fi fth of Greece’s debt held privately (the rest by offi cial institutions), & banks elsewhere in relatively better shape, contagion would more likely fl ow from leaving the ‘exit door’ o
pen, than a direct fi nancial hit from a Greece default.
- QE for Greece in late summer (best case) would be well timed, given the US Fed’s ‘exit’ from ultra-loose policy. This starts with its first rate hike since 2006, probably in September or December.
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