The probability of Greek exit, revisited
Jens Nordvig 17 December 2012
Fears of an imminent Greek exit from the Eurozone have subsided, for now. This column attempts to measure the probability of a Greek exit, finding that the changing fortunes of Greek political parties, and the possibility of an early election, mean that the risk of a Greek exit may actually be quite high. It suggests that, despite investors' efforts to measure political risk, a persistent sense of unease about the Eurozone’s future is set to continue into 2013 and that Eurozone financial assets will thus continue to embed significant risk premiums in the coming years.
Fears about a Greek exit from the Eurozone reached a peak around May 2012. At the time, the first round of the Greek election gave the populist Syriza party enough support for it to block the formation of reform and a bailout-friendly government.
How much people focus on the risk of a Greek exit at any given point in time can be quantified by tracking the volume of news reporting on the issue. Figure 1 shows a specific metric derived from counting news stories on the Bloomberg system.
Figure 1 Frequency of “Greek exit” in the news
Europe's nations and regions
Greece, Eurozone crisis, exit