Will the Greek crisis lead to contagion and spread of fear in other European countries?
As uncertainty over Greece's future in the euro continues, questions have been asked about how a Greek exit from the euro will affect other nations.
If Greece has to abandon the euro, consequences, or "contagion", to other nations could be dire. Particularly those – such as Spain and Italy – whose recovery is still shaky.
Why the Greek crisis hasn't sent markets into a panic yet
Sudden escalation of the Greek crisis initially led to a selloff in European shares and bonds in other southern Eurozone countries, but prices have since rebounded.
The technical default has become less important now Greece has scheduled a referendum to vote on creditors' reform proposals on Sunday, says Kit Juckes, macro strategist at Societe Generale. However, things could still escalate out of control.
There’s still a market conviction at this time that the decision to not make the payment this week, to not agree the terms that were on offer and to have a referendum on Sunday was a further step in a negotiating process, another move in a game of chess, as opposed to the end of the game.
Juckes says contagion in a meaningful sense is only likely to start when negotiations are perceived to have ended completely, or if the game is perceived as having "ended".
Alberto Gallo, head of macro credit research at RBS, adds that the next step is likely to be one of three scenarios: a third proposal being accepted before the referendum, which is unlikely, or the two results of the popular vote.
Protesters in Spain support Greece against the demands of the troika (Source: Getty)
So will contagion happen?
Actually, it's pretty unlikely. If the Greek people vote yes, Gallo says, “the government [will have] to resign or reshuffle into a new coalition or unity government and you very likely have a deal back on the table".
If Greeks vote no and reject their creditors' offer, many expect the country to leave the euro. The government will still be in power, but there is little room for a deal.
It is with a no vote that there would be more contagion than we have seen, says Gallo.
There [may be] a banking sector contagion – but that’s more indirect because direct exposure to Greece is very small, between 0.1 and 0.2 per cent in all countries.
However, a longer-term indirect exposure is political, Gallo adds.
In Spain, if Podemos, for example, forms a government that is anti-European, then you have a problem. Contagion is more likely in the case of a "no" as you create a precedent of an anti-Europe party being elected, deposit flight and so on.
Nevertheless, contagion still isn't a done deal in that scenario.
"You don’t get a big momentum building against Europe in any country within the euro area if they feel that Greece has left because it is bad for Greece," says Juckes.
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The instability is only likely to come if leaving the euro is thought to be a potentially successful economic tactic. At the moment leaving the euro area is something that happens because a county can't stay in – remaining in is not good for either side, meaning contagion risks are relatively small at this point.
Yet, with the drama taking new turns every day, crazier things have happened than a crisis of confidence and capital flight being triggered in other countries, forcing the government to impose a bank holiday. All that makes the logic of holding on a common currency becoming far less compelling.