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Wednesday, June 06, 2012

A euro exit may benefit Greece eventually but it won't be an easy ride

Over the weekend, we published a new briefing looking at the implications and likelihood of a Greek exit from the euro. We argued that an imminent Greek exit isn't inevitable, nor that it would solve Greece's problems - though, if managed, leaving the single currency could potentially be beneficial for the country in the long-term. Over on Telegraph blogs, we argue:
"if Greece defaulted and left the euro – perhaps following a failure to reach a compromise after the Greek elections on 17 June – it would be bad news all around:
  • The Greek banking sector – woefully undercapitalised since the losses it took as part of the second bailout – would instantly collapse. Pensions would take a massive hit too. In order to avoid a complete economic – and social – meltdown, between them, banks and pension funds would need an instant €55bn injection of fresh capital. At the same time, full nationalisation of Greek banks – which has been mooted by the ‘radical left’ Syriza party – could prove pretty disastrous. The balance sheets of the six largest Greek banks are equal to 113pc of the country’s GDP – taking on all their liabilities would send Greek debt to GDP skyrocketing once more, potentially eliminating the benefits of the debt write-down.
  • The new Greek Central Bank would also need to create at least €128bn worth of the new currency (63pc of Greek GDP) in liquidity to help keep Greek banks afloat as the Eurosystem withdraws its support. Hello inflation.
  • Contrary to popular belief, a euro exit wouldn’t mean the immediate end to austerity for Greece either – the country would still have to find savings of at least €12bn to pay various bills, including hospital and social security expenditure vital to uphold social order.
  • At the same time, the new Greek currency could devalue by around 30pc, which in theory increases chances of growth in the long-term (as the country is no longer stuck with a hopelessly over-valued currency), including a potential boost to exports equivalent to 10pc of GDP. But in reality, any potential export gain could be diminished if the ‘stub euro’ weakens (Spain springs to mind) or demand in Europe decreases further. Unlike previous devaluations in Argentina and Iceland – often used as comparisons – Greece has few natural resources or industries to fall back on, which may limit the benefits of devaluation. And remember, devaluing or removing a currency peg is not remotely the same as introducing a whole new currency. The latter is far more challenging.
So where does that leave us? Well, if Greece left tomorrow, we estimate that it could still need between €67bn and €259bn in external short-term support just to stay afloat. This could be split between the IMF, the Eurozone and non-euro countries.
The UK could potentially be involved in such a rescue package, via its IMF participation. In addition, the EU’s so-called ‘balance of payment’ fund – designed to help non-euro countries (which Greece technically would be) and in part underwritten by Britain (to the tune of 13pc) – could be activated. If the UK can get away with underwriting between €4bn to €6bn, which would be one scenario, it should count itself lucky. These would be loans, not up-front cash gifts, and if it served to stem contagion from a Greek exit, such loans would be justified.
To minimise the need for external support and risk of contagion, two steps need to be taken before Greece should even contemplate a euro exit: first, the banking sector should be recapitalised, shrunk, consolidated and restructured. Second, a primary surplus should be achieved to allow the Greek state to fund its day-to-day running costs without external help. Though this would make an exit far more appealing and – with a lot of luck – potentially beneficial for Greece in the long-term, the truth is that for Greece, whether inside or outside of the euro, the road ahead looks very rough indeed.
This is also why a new government in Greece – no matter what such a government would look like following the Greek elections – will likely reach a deal with its creditors, allowing it to remain inside the euro for now.
In European politics, the safest money is always on another fudge."


FrancescoA said...


Rik said...

1. The first question is why should the remaining EZ help Greece with another 100 Bn or so.
This is one of the rootcauses of the whole crisis. Countries doing what they want jeopardising others and getting away with it.
The EU isnot helping Bulgaria that is still much worse off, either.
2. Counterproductive anyway as it gives Italy, Spain and Co an incentive to copy that policy. Which would make any rescue unaffordable.
3. Typical European thinking.
4. Greece needs to get to a stable situation (a bottom) to start growing again. If it hasnot reached that point investors will simply stay away. And quick is is ruining it reputation and you carry a loss of reputation for a very long time. Anyway the first 2 or 3 year after abust nobody will invest. The longer you wait the longer it will take, the deeper the whole yoy are falling in will be and the more difficult it will be to get out.
In that respect a devaluation could be seen as a highway/fasttrack to the bottom/the new start. that cannot be avoided anyway.

christina Speight said...

Of course Greece will be better off outside the Euro - it would have been better still if it had quit 2 or 3 years ago. But the longer they leave it the less benefit of leaving.

The whole world would be better off if the euro was scrapped. Iclewmha 5t's a world menace.

christina Speight said...

WHAT'S HAPPENED TO YOUR TWO WORD PASS-KEY ? It's illegible AND it even got included in my message making a nonsense of the last sentence

Rik said...

To come back on my earlier remark that mainly focussing on Greece is typical European thinking.
1. What is happening in Greece itself is hardly important for the bigger picture/worldeconomy. The financial exposure of other EU and UK institutions is marginal now the major part of the sov debt de facto is taken over by the European taxpayer.
2. The contagion is basically pure psychological. Or better could be. Most people already think that Greece will leave the EZ at one point. And the countries that could catch the debt-bug have already been infected via other ways. The rest looks safe.
Most likely a non-event like the CDS.
3. It looks like the Greeks want to run the risk to hang themselves to blackmail the rest. The only option being when looking for a working solution is let them hang themselves. Giving in means de facto giving in into Spain/Italy as well which is simply unaffordable. Which doesnot mean it won't happen. And helping them via the backdoor effectively will do the same.
4. Looking at the role of the UK it should stay away for 2 reasons the closer you get the more money you can contribute and the further you are away from the contagionpool the smaller the effects will be. Especially seen the fact that the UK has basically no influence on the events.
5. It is in the UKs interest to reneg the EU treaty as for most of its people this is probably the minimum position.
6. To do that preferably the conditions should be right to do so. Meaning that a sort of shock event has taken place so everybody has to consider its own position anyway. Plus some barganing tools (think about EU-treaty change veto possibility).
7. The shock and rethinking by the other EU memberstates will rather happen with a self-inflicted disaster in Greece than with again another donation. The rootcause of this crisis is that individual countries can do what they please and jeopardize others with it AND get away with it anyway. Furthermore a further rescue is via EU (likely a main source of financial assistance) and IMF more likely to be paid partly by the British tax-payer anyway.
8. Strategic targets for the UK are reneg the EU treaty, no mess in the core EZ (which it cannot influence) and pay as little as possible for the mess. Getting the Greece house in order is simply not one of them. Even worse is counter productive.