Rumors are swirling around the eurozone that Greece may soon be the first member to leave the monetary union, with all sides holding their breath in advance of Greek general elections scheduled for Jan. 25. The last time "Grexit" was seriously considered was also during a Greek election; in fact, there were two. The first election in May 2012 failed to return a usable result, so a second election took place the following June 17 and led to a coalition of the country's two traditional center-right and center-left rivals — a desperate measure to keep Greece's mainstream parties in power.
Looking at the difference between market reactions then and now is informative. In 2012, Greek bond yields — one indicator of the likelihood of default — flew up to 30 percent, but the statistics to watch back then were the yields of other Southern European states. Back then, it was clear that the market was linking Greece's problems with a likely contagion to Italy and Spain (and several other peripheral economies) since Italian yields also rose, almost hitting 7 percent, which was considered unsustainable for the Italian economy. This time around however, the market has been much more relaxed about Greece's travails. Greece itself has only seen its yields rise to 10.68 percent, while the other peripheral countries have seen their yields stay largely unaffected. There are several reasons for this.
In 2012 the eurozone's banks were heavily exposed to Greek debt, and were more vulnerable to defaults on any loans they had made, thus a chain reaction was theoretically possible that could bring down the eurozone's banks and then its governments. Confidence has now been shored up by the creation of a banking union, while the balance sheets of European banks have also been largely cleaned up in the intervening years. In addition, the majority of Greek sovereign debt is now held by large institutions (the IMF and various European institutions) that are better able to take the hit in the case of default, reducing the danger of contagion.
Nevertheless the market is still being overly complacent. A Grexit may not have the same immediate financial repercussions that it would have had in 2012, but the potential political disruption from a member state leaving the eurozone remains extremely significant, not least because the mechanism for such an exit has yet to be designed, meaning the procedure itself may be messy and disruptive. Also, once the exit has been revealed, that option will become much more feasible for the remaining members. So while the immediate financial ramifications of a Grexit may not be filling the market with fear right now, the political effects certainly should be.