Equal chances to a Greek exit of the euro-zone and contagion to other countries, according to the team at UBS.
The crisis significantly escalated over the weekend and banks remain closed in Greece. So, here goes:
Here is their view, courtesy of eFXnews:
Forecasting Greek developments and their market impact has been a humbling exercise and it just got more difficult, notes UBS.
“Our framework is to tie two medium-term probabilities and one outcome together for this week. We examine the current dynamics around a) the probability of Grexit and b) the probability of contagion,” UBS adds.
A 40% probability to Grexit:
“The layers of uncertainty involved make an ex-ante guess of the probability of Grexit a very tricky task. Dissecting the different layers of uncertainty, however, helps us compute what we consider to be a reasonable probability of the event: 40%,” UBS argues.
“There is one key factor that lowers the odds of Grexit down to about 40%. According to the relevant studies, the history of polls shows that a change from the status quo leading to worse outcomes for the population tends to be voted down in most cases. In the case of Greece, these worse economic outcomes will be increasingly visible from Monday onwards,” UBS clarifies.
A 40% probability to Contagion:
“According to our best assessment, the risk of severe contagion stemming from a potential Grexit is currently c.40%. This judgement is based on our assessment of three dimensions: firstly, the size of the Greek economy and its external debt; secondly, the external linkages; and thirdly, the likely policy response. Given the relatively small scale of the Greek economy and limited external links, we suspect the key risk might be around the timeliness and credibility of policy response,” UBS argues.
“Currently, we see c.60% probability of a swift and completely effective response from the authorities. But if market reactions were to show distress, then we believe the likelihood of effective policy reaction would increase,” UBS adds.
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