The greatest risk to the eurozone comes from the potential combined failures of the Greek, Portuguese, Spanish, Irish and Italian economies, says Jacques Tebeka, head of diversified multi-management at Edmond de Rothschild Investment Managers.

The consequences of a Greek default alone appear overplayed, as the crisis-stricken nation only represents less than 2 per cent of the eurozone’s GDP, says the firm in an investment note. The real threat lies in contagion, according to Tebeka, who points out that, should the peripheral countries be dragged down with Greece, systemic risk would be likely and substantial enough to have a significantly negative effect on the eurozone.

While the Greek crisis is far from the first case of excessive sovereign debt, it is still a unique case compared to previous instances of this predicament, says the note. Greece’s quandary differs from other nations who have previously experienced a debt crisis, such as Mexico, Argentina and South Korea, as Greece is part of the European Union, which takes away the nation’s power to set its own monetary policy. Therefore Greece cannot adopt monetary stimulus as a solution, which would have boosted the economy as a result of a falling currency promoting inflation and increasing exports.

Consequently, according to Tebeka, Greece’s only option is to make amendments to its fiscal policy, which will shrink the economy and lead to wage cuts. The probable resulting social turbulence will add to pressures on the Greek government at an already crucial time, thus compounding the uncertainty surrounding the region, says the note.

This uncertainty has certainly had an adverse effect on global stock markets, which Edmond de Rothschild sees as an investment opportunity. The firm is moving its cash holdings into other assets, in particular into convertible bonds, says the note, but it remains wary of the volatile periphery of the eurozone. It is therefore currently avoiding investment into the peripheral eurozone nations and has diversified its portfolio further, adopting geographical diversification as the main driver of this strategy, according to the note.

Having identified contagion as the only real threat to the eurozone, Tebeka comments that this situation can be avoided if the European policy makers can somehow restructure Greece’s debt rather than implementing a three-year plan, which Tebeka sees as unrealistic. This view lies in contrast with other investment houses such as ABN AMRO, which claim a debt restructure would be ineffective in solving the Greek crisis, as its expenditure continues to exceed its income, thus continuing to build up its debt.

In any case, if contagion is not avoided, Greece and other peripheral countries may be forced to exit the eurozone, which would hit the financial markets hard, says Tebeka, who is of the opinion that a federal European state is already a likely outcome following this crisis.