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Credit Insights

Will One Bad Apple Spoil the Bunch?

While Greece leaving the eurozone would cause significant stress in the short term, we think the greater impact is the precedent it would set for other financially beleaguered countries.

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Similar to how a corporate management team will provide the market with clues and revise guidance in order to manage expectations when earnings are coming in light, it feels as if the market's expectations for a Greek exit are being managed higher.

Following the inability of the Greek government to form a majority since the recent elections, we have seen reports from each of the major investment banks and many independent think tanks that address the potential outcomes if Greece exits the eurozone and reverts to its own currency. While an exit is unlikely to occur in the next few weeks, the markets are again pricing in an increasing probability that this will occur. Many pundits are speculating it could happen as early as this summer. The next round of Greek elections is scheduled to take place in June, although it is unclear that the government will be able to form a ruling coalition even after this round of elections. It appears that the populace has grown frustrated enough with its situation that it may prefer to take on the risk of going its own way as opposed to sticking it out in the eurozone.

David Sekera does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.