So what is the likelihood of Greece leaving the Euro Currency and even perhaps the Euro Zone? What would be the cost and what would be the fall out?
In this report I will outline the facts as best I can and share with you a few different scenarios that could potentially happen and give you my humble view as we go, for what it is worth.
Some are calling the potential Greek Exit a Grexit, so let’s run with Grexit, I like it but I would prefer not to see it happen, even though I did say “let em go” a few days ago.
If I wanted to simply look at it from the pure selfish point of view, making money, I would cheer any development that saw Greece move closer to a Grexit, but I know what will happen if Greece does leave. Poverty for millions, helplessness and economic uncertainty, for not just the Greek people but Europe in general. I don’t wish that on anyone. They are suffering enough already, suicide rates are up, there is starting to be a run on Greek (and Spanish) banks and businesses are going bankrupt trying to cope with what is seemingly a hopeless and desperate situation for the Greek and Euro Zone.
What are the costs and fall out of a Grexit?
Firstly, a Grexit would cost the European Central Bank and Euro Zone potentially hundreds of billions of dollars and Germany and France would be amongst the biggest losers. The European Central Bank and the International Monetary Fund are said to be holding 200 Billion Euros of Greek debt. We saw last year that Greek bond holders already had to take substantial losses on 130 Billion Euro’s, so with the ECB and IMF holding 200 Billion Euro’s, although the economy in Greece is small the losses are significant and there simply isn’t the cash reserves at the ECB or IMF to handle more countries such as Spain and Italy to fold financially. Figures of up to 1 Trillion Euro’s for a Grexit are being thrown around and I’d believe it.
Not only would banks in Europe potentially need to be recapitalised but also some governments as the cost would be spread all through Europe and contagion would be unavoidable. The ECB, IMF and the European Financial Stability Fund will no doubt step in and try and stabilise the situation, however they are already stretched and the ECB has been reluctant to step in recently. Why? Perhaps they are waiting on things to be so extreme, but I don’t think so. I question whether or not they have the funds or plan to tackle this toxic financial cancer. Central Banks in Europe would simply have to suck up the losses collectively at a time when the bank capitalization levels in Europe are already being drained.
Currently approximately 1 Billion Euros per day is leaving Greece with Billions and Billions more since the election on the 6th May. When Greece entered the Euro, 350 Drachma bought 1 Euro, however if Greece leaves the Euro it is likely to cost twice this for one Euro.
CNBC reported a Greek exit from the euro zone could cost the French taxpayer up to 66.4 billion euros and burden the country’s banking system with 20 billion euros in lost loans. And smaller countries would be hit even harder. One of the big problems is the Greece’s debt is in Euro’s and not Drachma and if Greece was to return to the Drachma it would be worth considerably less and thus making Greece’s ability at all levels, public and private near impossible to repay debt.
From what I can see the Greeks want to have their cake and eat it too. They genuinely want to stay in the Euro but don’t want to tow the line on austerity. But unfortunately they can’t have both. On June 17th the Greek people are essentially voting on if they want to stay or go. More than 2/3’s of people voted for political parties at the election on May 6th that were against the austerity imposed by the previous Greek Government. But 3/4 ‘s of Greek voters want to stay in the Euro. So they do want their cake and to be able to eat it too.
If Greece leaves the Euro the dilemma is how to announce it. If they have a stagged withdraw there would no doubt be a run on banks and panic to get money out of Greece. Others suggest the only way is to announce it over a weekend and freeze all transactions and Greece converts to the Drachma Monday morning, and until Drachma’s can be printed, a stamp is put on Euro dollars in Greece, a sign that “this Greek Euro is not the real deal”. There is no easy way out and any way you carve it, it is going to be long, messy and very costly, in or out of the Euro Currency.
If the Greeks go back to the Drachma billions of dollars of wealth in Greece will be lost. Businesses who have loans in Euro’s will go bust as they simply won’t be able to re pay the loans in Euro’s as the Drachma will be worth less than half, maybe even less. My thoughts are many parts of Greece would simply continue to use the Euro and ignore the Drachma. Try paying for something with a credit card outside Athens now anyway, they only take cash! So Euro’s will do just fine thank you.
The biggest danger for the Greek people is the government and banks being shut out of international capital markets. They would be effectively starved of money and this is my biggest concern as this exact scenario is what caused Lehman Brothers to trigger off the last GFC, which has now just evolved for a second time in 4 years. Lehman was small fry in the big scheme of things, and so is Greece, but the implications and contagion could be dramatic. Greek banks would need to be nationalised if they leave the Euro currency and loans for big businesses would be difficult to find.
Banks around the world would be forced to write off Greek debt and countries like Australia and New Zealand whilst not directly linked to the Greek crisis would be hit hard as financial markets around the world collapse and money flows would be seriously disturbed. Not to mention the loss of value on share markets and super funds. A Grexit would cause another major credit crunch, the Aussie dollar would likely dive to GFC levels, interest rates would be slashed and property markets would again grind to a halt as Aussie and Kiwis hang onto their money and save what they can. Unemployment would again rise and the government would be back in deficit (not out of it yet) having to stimulate with money they can ill afford to spend with the mining boom over. Wayne Swan is nervous watching the European crisis. Any further deepening of the Greek and European debt crisis threatens his ability to deliver his first and what is sure to be his last surplus.
I honestly believe Greece should stay in the Euro Currency and it is clear they don’t want to leave. And Europe frankly can’t afford to see Greece leave the Euro currency and is going to need to suck it up and do whatever it can to keep them. We are about to see a period in Europe that could potentially cause civil unrest, street violence, massive unemployment and even a military coup or two. Could we see the unthinkable, a war. Let’s hope not, but history tells a different story.
Greece needs the Euro and the Euro sadly as tough and as it might sound needs Greece.
