ECONOMY

Moody’s warns risk of Grexit should not be underestimated

Moody’s rating agency warned on Thursday that the impacts of a Greek euro exit could be much wider than many people think.

The report, entitled “Greek Euro Area Exit Might Be Manageable, But Risks Should Not Be Underestimated,” argues that while the direct economic and financial impact of a Greek exit would be small, an exit would damage the euro area’s longer-term resilience and could trigger a more immediate confidence shock, disrupting government debt markets.

“The impact of a Greek exit should not be underestimated,” said Alastair Wilson, managing director of global sovereign risk at Moody’s. “The direct impact might be limited because of Greece’s limited trade links and lower financial market exposure to Greece in other euro area countries. But exit could nevertheless cause a confidence shock and disrupt government debt markets.”

Moody’s says in its report that a Greek default and possible exit from the single currency could also raise doubts about whether other countries might leave the euro in the future.

“Greece leaving the euro area would offer an example that might be followed in future,” Wilson added. “That would inevitably influence the course of future reform and fiscal consolidation programmes. It would raise, even if only a little, the likelihood that they too could end in default and exit.”

Moody’s downgraded Greece’s government bond rating to Caa2 from Caa1, with a negative outlook, on Wednesday.