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Global Investment Outlook • Eric Lascelles • Daniel E. Chornous, CFA • John Richards
but more problematic, alternative is a
much more extreme Greek government
that will seek to pry loose major planks
of the Greek bailout, and in so doing
risk the viability of Greece within the
Eurozone. In fairness, some form of
renegotiation with Europe will be
necessary regardless of the election’s
victor: Greece still has too much debt,
possibly insolvent banks and a freefalling
economy. It is also missing
austerity targets left and right.
Meanwhile, in the lead-up to the
election, Greece is effectively
rudderless. A slow-motion run on
its banks is occurring, and if this
continues to accelerate, there are no
leaders to arrest it. This is just one
of several scenarios that could push
Greece out of the Eurozone. A failed
bluff or a simple policy misstep would
also suffice.
The most cogent argument in favour of
continuing Greek membership is that
an exit would set an awful precedent
and quite possibly begin an irreversible
unravelling of the Eurozone. No one
wants this, and so quite a lot of
firepower will be used to avoid this fate.
Greece’s exit would certainly be
economically devastating. Estimates
vary widely, but the Greek economy
would likely shrink by 15% or more,
and it would suffer a massive run
on its banks, widespread business
bankruptcies, a bout of very high
inflation, and an assortment of other
ills. Meanwhile, the rest of Europe
would be presented with a bill for
about €300 billion in loans gone bad,
and conceivably incur total costs in
the range of €1 trillion. All told, the
economic hit might be akin to the post-
EXHIBIT 10.
%
EXHIBIT 11.
%
100
80
60
40
20
90
80
70
60
50
0
Greece Wants Euro
81%
Greeks wish to
remain in Euro
Source: GPO SA, May 30, 2012
Spanish Debt-to-GDP Ratio Not So Bad
France
Source: Haver Analytics, RBC GAM
Lehman experience. Eurozone-wide
GDP could easily shrink by 2% to 4%.
It is difficult to say whether global
financial markets would freeze with
quite the ferocity of 2008 given the
lessons learned since then, but they
would certainly not function normally,
and this would be the primary means
by which a Greek exit could ricochet
well beyond European shores.
We reiterate that while this scenario
is horrifying to contemplate, it also
constitutes a central reason why a
Germany
2011
52%
Greeks wish to remain in Euro even if
bailout not renegotiated
Spain
SAMPLE
Greek exit remains unlikely: nobody
wants the consequences.
Spanish woes
Spain remains a curious case. It has
far less government debt than the
European norm, and even than France
or Germany (Exhibit 11). By this
definition it is eminently solvent and in
an enviable position.
However, everything else about Spain
is much more dour. It has a large
fiscal deficit that is proving resistant
The global investment outlook RBC INVESTMENT Strategy coMMITTEE Summer 2012 I 15