The threat of Greece exiting the eurozone looms large

By Sara Sjolin

Published: Mar 17, 2015 1:31 p.m. ET

Morgan Stanley sees 25% risk of Grexit over next six months

LONDON (MarketWatch) — With hefty debt payments looming, a shrinking economy and political tensions, Greece is far from out of the ‘Grexit’ woods yet, Morgan Stanley analyst said on Tuesday.

“Contrary to many commentators, we don’t think that the probability of a euro exit has diminished. While we’d still put it at one chance in four over the next six months, it feels as if we’re at the high end the range, and its probability may increase further,” they said in a note.

And if it does happen, it would have consequences for the eurozone, according to the investment bank. The gross domestic product for 2015 could slip by 0.2%, compared with the expected 1% growth if the currency union stays in its current form. The euro EURUSD, +0.23% might slide to as low as $0.82, around the weakest level ever for the shared currency. And the fair value for European equities would fall by around 10%.

Greece is at risk of running out of cash within weeks, remaining shut out of debt markets as it negotiates a reform program with its international lenders. The rest of the eurozone has frozen the next tranche of financial aid to Athens, unless the Syriza-led government agrees to implement a range of economic reforms.

The Athex Composite Index GD, +0.88%  has shaved off almost half its market value overt the past year and is down 6.8% year-to-date.

So far, attempts to hammer out a deal have ended at an impasse. Greece has been calling for more leniency on its bailout requirements, while other eurozone members — particularly Germany — demand the country sticks to austerity measures that have already been agreed upon.

Locked out of capital markets, unable to access bailout money and with a €2 billion debt payment due on Friday, the Greek government on Tuesday was expected to outline emergency liquidity plans to parliament, Bloomberg reported.

Also on Tuesday, Greek Prime Minister Alexis Tsipras requested to meet with German Chancellor Angela Merkel, European Central Bank President Mario Draghi, European Commission head Jean-Claude Juncker and French President François Hollande at this week’s EU Summit, according to Reuters, citing a Greek official. Maybe more controversially, the Greek Premier is also expected to visit Russian Vladimir Putin in April.

“Greece’s situation is deteriorating rapidly,” the Morgan Stanley analysts said. “The economy is now shrinking, tax revenues are falling short of targets, bank deposits are leaving the system and political volatility seems on the rise, both domestically and in the relations with official lenders. The chance to see a quick compromise has diminished.”

Morgan Stanley analysts are forecasting say capital controls may be imposed upon Greece. They raised the possibility of that happening to 35% from 20% and downgraded their view on Greek equities to neutral from overweight.

Sara Sjolin is a MarketWatch reporter based in London. Follow her on Twitter @sarasjolin.

http://www.marketwatch.com/story/the-threat-of-greece-exiting-the-eurozone-looms-large-2015-03-17