Asia Slammed: Grexit With 40% Probability, or 85% Depending on Who You Ask -- Barron's Blog

        By Shuli Ren
        Asian markets are suffering from the rising possibility of Greece leaving the Euro Zone on Monday.
        Mujtaba Rahman at Eurasia Group, a political risk consultancy, said that if the Greeks decided to vote NO on eurozone's bailout package, then it is game over:
        Although the government would then claim it is looking for a "new" compromise within the democratic constraints given to it by Greek voters, it is very unlikely creditors will be willing to put a more flexible offer on the table. Tsipras will claim this is something that demonstrates the undemocratic behavior of Greece's creditors. With no program in place, and no signs that one will be forthcoming ahead of 20 July, the ECB will terminate its support of emergency liquidity for Greece's banks. The government would also most likely have to issue IOU's: to fund Greek banks and pay internal obligations. As Greece defaults on its ECB repayment, the government would slide inexorably towards GREXIT.
        Eurasia Group assigns a 40% probability to a Grexit.
        UBS similarly this morning assigned a 40% probability to the Grexit. A big chunk of their reasoning relies on the recent opinion polls that suggest most Greeks still want to be in the euro zone:
        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. The ECB's decision to cap the ELA implies a quick evaporation of liquidity in the banking system. This will likely disrupt day-to-day life significantly, limiting domestic payments (wages, pensions etc.), shutting down external payments (for exports etc.), rationing imports over time and disrupting the credit flow leading to private sector defaults.
        Sell-side analysts are too polite. According to Mohamed El-Erian, the former chief executive at PIMCO, the probability of a Grexit is 85%, Bloomberg reported:
        "There's an 85 percent probability that Greece will be forced to leave the euro zone" in the next few weeks, El-Erian said in an interview from New York. "What we are seeing here is what economists call the sudden stop, when the payment system stops. The logic of a sudden stop is a massive economic contraction, social unrest and it's going to make continued membership of the euro zone very difficult for Greece."
        Asian markets are in a pool of blood today. Japan's Nikkei 225 slumped 2.1%, exacerbated by weaker-than-expected industrial production data. Taiwan retreated 2.3% - a massive inflammable powder explosion that hurt 500 people at a recreational water park definitely hurt. Australia's ASX Index slumped 2.1% and India's S&P BSE 100 Index fell 1.9%.
        Greece continues to sink the risk appetite for emerging markets, despite its small weight. This year, the Global X FTSE Greece 20 ETF ( GREK) fell 12.1%, the iShares MSCI Emerging Markets ETF ( EEM) rose only 2.4%, even though the iShares China Large Cap ETF ( FXI) rose 11.6%. The iShares MSCI Taiwan ETF ( EWT) rose 5.6% and the iShares MSCI India ETF ( INDA) gained only 2.2%. The iShares MSCI Australia ETF ( EWA) fell 0.9%.
        (END) Dow Jones Newswires

        June 29, 2015 00:40 ET (04:40 GMT)

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