Investors are underestimating the chaos that a Greek exit from the eurozone could trigger, many of the City of London’s top financiers have warned.
The immediate financial fallout from a possible “Grexit” has been mitigated over the past couple of years, as banks have shored up finances and cut exposures. But according to a poll of the FT City Network — the Financial Times’s forum of chairman and chief executives from across the banking, insurance, investment and broader business communities — markets are too sanguine about the knock-on risks.
Disintegration of both the eurozone and the EU are the biggest threats, the forum warned. “Neither the eurozone, nor perhaps even the EU itself could survive a stampede out the door,” said Xavier Rolet, chief executive of the London Stock Exchange.
Tidjane Thiam, chief executive of insurer Prudential, said: “Financial markets seem remarkably relaxed about a potential Grexit; they believe that either it will not happen, or it will not matter. That belief deserves to be challenged.”
Grexit would “accelerate a dismantling of euroland”, warned Robert Swannell, chairman of Marks and Spencer. It would be a “signpost for others to follow in times of distress”, echoed Sir Roger Carr, chairman of BAE Systems.
Although Greece has struck a deal to extend its current €172bn bailout by four months, Athens is rapidly running out of cash to pay its debts. There is little sign that creditor countries, led by Germany, are willing to release rescue funds without politically difficult economic reforms.
If Greece was forced to default on some of its debts, it could rekindle massive bank withdrawals, which hit €12.8bn in January. Eurozone officials have long feared that a bank run could lead to an “accidental” Greek exit, because the European Central Bank could be forced to cut off emergency loans to insolvent banks. Without the ECB assistance, Athens would be forced to print its own currency to restart its financial sector.
Although Greek markets have been volatile, the yield on 10-year government bonds is now back below 10 per cent, following the bailout extension deal. Other government bond yields across the eurozone periphery have moved to record low territory, with Italy’s and Spain’s 10-year yielding just 1.35 per cent and Portugal’s 1.87 per cent.
Two members of the FT City Network — M&S’s Mr Swannell and Stephen Hester, head of insurer RSA — described Greece’s continued position within the eurozone as akin to “an emperor with no clothes”.
Mr Hester was among a small minority who argued that the eurozone should take a more aggressive stance, triggering Grexit if the Greek government baulks at further reforms. “If Greece isn’t prepared to reform enough to stay in I don’t think the EU should risk the knock-on political dangers of too much compromise towards Greece that could halt reform in other member states,” he said.
Describing the situation as a tragedy, Helena Morrissey, who heads fund manager Newton as well as trade body the Investment Association, said reforms that created mass unemployment were “surely a pyrrhic victory”.
The Financial Times
The FT City Network is an invitation-only forum, comprising more than 60 business leaders. It debates financial affairs online on a monthly basis.