The possibility of Greece exiting the eurozone is looking more likely, amid continued vows from new Greek Prime Minister Alexis Tsipras to scale back austerity measures the country previously agreed to in exchange for a bailout package. This leaves investors wondering if Greece will honor its financial commitments. The Street's Scott Gamm speaks with Michael James, managing director of equity trading at Wedbush Securities to discuss the implications of a Grexit from the eurozone, along with why the volatility seen in U.S. markets so far in 2015 is expected to continue.
Here is how UBS believes a Greek Eurozone contagion will play out:
The contagion risk of a euro exit reflects the fact that there is a meaningful risk that other countries would join Greece in leaving the euro. The euro is patently not an optimal currency union at the moment, which gives economic momentum to the idea of a broader fragmentation.
Whether other countries leave the euro is contingent on two questions with binary outcomes:
- Do bank depositors think that their country could leave the euro?
- Does the euro area guarantee the integrity of the banking system?
A "double lock" is required to prevent contagion. An assurance that bank deposits are guaranteed by the ECB is completely worthless if the general public believe that the country is going to leave the Euro. If one believes that one's country may leave the euro, then what the ECB does or does not do will no longer apply within one's country,and so it is rational to withdraw one's money sooner rather than later. The parallel here is to the Czech and Slovak monetary union break-up in 1993; the governments both assured the public that the monetary union would stay and their savings were safe, but the public did not regard these statements as credible and so removed their savings from banks. The process became self-fulfilling as the extent of deposit flight contributed to the governments being forced to break their promises and end the monetary union.
Read more: Zerohedge.com