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ECONOMICS – FINANCE – WORLD NEWS – GREEK DEBT

‘Grexit’ scenario roundup

In the last couple of days and weeks, the news websites around the world have been swamped with scenarios for Greece’ exit from the eurozone, from Europe, from the world. It’s time for a roundup. Your experience [or reality] may differ.

Let’s start with the Wall Street Journal’s four scenarios

Scenario 1: Syriza, the leftististists, wins the election in July, the European bailout program comes to a halt, Greece runs out of money and returns to the drachma. Involuntary austerity all over the place. Scenario 2: No exit, “no austerity”. Greece stops any sort of public spending and the country deteriorates while keeping the euro until there is light at the end of the tunnel. Unlikely to be very popular with the Greek people. Scenario 3: No exit, Syriza doesn’t win the elections, the bailout program is renegotiated, i.e. the EU and the IMF pump more money into Greece. Unlikely to be very popular with the European governments. Scenario 4: Greece sticks to the bailout program, regardless of the government that comes into power in summer. Ha! Oh wait, that wasn’t a joke.

In an interview with WSJ, Syriza leader Alexis Tsipras said Greece would have to stop paying its creditors if bailout funds would be withheld.

The Dutch newspaper de Volkskrant (article in Dutch) starts by pointing out that Greece is not just like a bankrupt company that can be liquidated. Actually, I’m pretty sure you could find buyers for all those islands and the acropolis… Maybe there’s a plan there. Anyway, the article goes on to argue that if Greece runs out of money, its banks will shut down completely to prevent a full-on bankrun, meaning that debit and credit cards would stop working from one minute to the other, factories would close down, the police force would shrink, there would be a country-wide curfew to prevent riots, gas and coffee would become unavailable. The alternative scenario sees Greece returning to the drachma, while the euro lives happily ever after in the rest of the monetary union. Greece would be demoted to the same status as Hungary, which received structural financial aid form the EU on better terms.

The scenario of German magazine Der Spiegel (article in English) is more dramatic by name: Life or death.

Greece returns to the drachma and gets the same status as Hungary et al. That way, EU members outside the eurozone have to contribute to the financial aid pie as well. While the drachma is redistributed, the country takes a week off from everything, while the police is guarding the delivery process of new money. The switch is flipped and everything changes into the drachma over night at a fixed rate. When they say ‘everything’ , I presume they only mean public spending (pensions etc) and not private contracts. That should be a bit more difficult (and corporate lawyers will make a lot of money off it). The IMF predicts that the Greek economy would contract by up to 10% within the first year before resuming growth. And it better grow fast, because “the last bond held by the ECB matures in 2030.” The devalued drachma would shift the import/export balance in Europe and Tesco olives would suddenly actually be from Greece (fine, they already are, but you get the point). None of this means Greece’s debt burden will decrease as such. Instead more of it is likely to be written off, meaning that more money will vanish.

If Greece returns to the drachma, that will be the point when Europe’s work really begins.

JP Morgan put its scenarios in a flow chart, also found on Alphaville’s roundup of banks’ opinions on the future of the value of the euro. Consensus(ish): a plummeting euro and crazy volatility [which is not a technical term].
As for the costs of an exit, it could amount to €66.4bn for France, €89.8bn for Germany and €19.8bn and €4.5bn for French and German banks respectively, assuming 50% depreciation of the new drachma.

Reuters Breakingviews editor Hugh Dixon writes that Greece was meant to be a special case for an EU bailout in 2010. But then Ireland and Portugal happened and governments started falling all over the place. So why would Greece remain the only country leaving the monetary union? What would happend to the other troubled countries? The panacea: the European bailout funds EFSF and ESM, provided the IMF chips in more money to actually make them big enough to make a difference.

Nouriel Roubini, who saw it all coming long long before it was actually coming (…), sees an exit as the only viable option. The alternatives: devaluation of the euro, retarded amounts of quantitative easing, reduction of unit labor costs, internal devaluation. All of this kind of leads back to the question how you devalue parts of a currency. As for the exit, Greece’s balance sheet would we absolutely out of control and many European financial institutions would lose a lot of money. Greece would return to the drachma and the European Stability Mechanism (ESM) would provide money to recapitalize the banks. The bottom line: the exit is necessary, despite how painful it may be.

Martin Wolf of the FT points out that while 80% of Greeks want to keep the euro, its the politicians just don’t get their shit together. And then some inductive reasoning:

A departure would create severe dangers. The danger of contagion is obvious. The long-run danger is more subtle. But the eurozone either is an irrevocable currency union or it is not. If countries in difficulty leave, it is not. It is then an exceptionally rigid fixed-currency system. That would have two dire results: people would not trust in its survival and the economic benefits of the single currency would largely disappear.

In public appearances yesterday, both Mario Draghi and David Cameron (less clearly) stressed that they don’t want to see Greece leaving the eurozone. Having said that, they are running out of patience – something everybody’s really short on in Europe.
Do we know more now? We certainly do. Nonetheless it isn’t really clear what is going to happen. It looks like Greece will exit the euro. It probably should, disregarding the non-existence of an exit clause. It probably should have already done it over Christmas. Needless to say, this won’t be pretty, but what’s the world to do? The political turmoil that all of Europe is finding itself in these days is likely to continue until economic growth is restored, whenever that may be…

Have a good weekend.

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