The Prodigal Greek

The Greek crisis through a different prism

Ground zero

with 8 comments

The result of May 6 elections in Greece led to a complete reshuffling of the local political dynamics, shook the relative calmness post the completion of the PSI and brought back with intensity on the agenda the country’s exit from the euro zone.

The undisputed momentum of the radical left party of SYRIZA, combined with the inability of the local political establishment to handle the outcome of the elections in a nationally united manner, will most likely lead to a repeat election mid June and potentially in a prolonged period of political instability and governance void.

SYRIZA’s leader Alexis Tsipras, whom polls last week saw in the first place in the event of an elections re-run, has a revolutionary view of Greece’s relationship with the troika, combined with some radical proposals in terms of the country’s fiscal response to the crisis. This has brought back the stand-off between European officials, in particular Germany, and parts of Greece’s political establishment.

Cornerstone to SYRIZA’s ideological platform is the belief that Greece has a strong negotiating position on the basis that it will never be left or pushed to abandon the euro because such a development would have severe implications for the entire eurozone, already in fragile condition after Spain’s troubles have been added to the mix.

On the other side of the argument, there are those who believe that the euro has now built strong defences to withstand such a shock with the ability to contain the impact.

The impact on euro zone of a potential Greek exit, Spiegel magazine estimated today the damage for Germany to be me the region of €77bln, will depend on the response from the ECB, which recently through LTRO showed that is willing to intervene in unconventional ways to support the single currency.

On the other hand, it is possible to map how a potential exit will impact the Greek economy and based on past crisis episodes estimate how the developments will unfold.

Thus far, the Greek political establishment and mainstream media have approached the topic of euro exit in a rather superficial manner, always under the pressure of the receipt of a tranche or the vote of an austerity package, attempting to shock the public with references of empty super market shelves, shopping tokens, closed schools and under-performing hospitals.

Considering the new dynamics in the Greek political arena, it is essential the Greek people are sufficiently and intelligently informed on the impact of a euro exit, provided the country’s strategy and negotiation with the troika could incorporate a change from the approach to date and attempt to apply pressure with a potential euro exit episode.

The post does not attempt to take a political stance in the debate.  The sole intention is to highlight a probable sequence of events from a Greek euro departure.  There is a body of respected economists that since the beginning of the crisis support the view that an exit from the single currency is the best solution to the country’s troubles.  However, even the euro exit supporters agree that the impact of such a move in the short-term will be painful.

The crisis and solutions implemented over the last two years have developed in such a way that euro membership or exit are a choice for Greece since by treaty a country can only voluntarily exit the union and subsequently the euro.

Currently, Greece’s access to euros comes from two sources, troika loans and the ECB through the euro-system. Should Greece decide a stand-off with the troika that will lead to the withholding of the program’s next tranche, the country will find itself with no funds to re-capitalise its cash strapped banks and no money in the escrow account to meet debt obligations, something that will lead to default.  Greek banks’ only source of funds at the moment is the ELA through Bank of Greece, something that in the event of default is highly unlikely that the ECB will allow to continue.  Without the recapitalization from the EFSF and with no access to the euro-system, the country will effectively find itself without a banking system, and without a banking system economic activity will come to a halt.

It will not be a diplomatic gang up of eurozone partners attempting to oust Greece from the euro.  It is Greece itself, dry from cash, that will make the forced decision to leave the euro and return to a currency that its central bank will control.

Upon introduction the new currency is expected to devalue between 30-40% relative to other major currencies, automatically wiping out the equivalent of the purchasing power of the country for all transactions outside Greece.

As much as this loss of value for the newly introduced currency will favour the trade balance, since imports of final goods will most probably collapse, Greece remains dependent for large parts of its raw materials and energy on imports.  This increase in costs will eventually get cascaded to the final products and services leading to significantly higher prices and inflation levels.

Provided that the government will remain outside the markets, it will need to monetise the running deficit of 2012 and print additional money to recapitalize the failing banking system, it will significantly increase the money supply further putting upward pressure on prices.

In the first weeks after the exit announcement, they usually come in the weekend, the government will need to impose capital controls in an attempt to avoid capital flight and control the hard currency reserves of the central bank.

The Greek central bank in an attempt to avoid a run on the currency, exit from greek currency denominated assets and control its hard currency reserves, will probably raise interest rates to levels high enough to entice Greek currency holders to hold on to it.  The effort to maintain some level of stability in the banking system, almost with certainty will bring a deposits freeze and controls on the amounts of withdrawals.

There is nothing to guarantee that those measures will suffice to keep the situation under control.  Combining with the need of businesses for cash since no partner outside Greece will be trading with them on credit, the central bank will need to print additional money that through the banking system will flow in the market intensifying the inflationary pressures.

The Greek economy will experience in the short-term a collapse in domestic demand that will not be able to substitute with foreign demand, unlike other crisis hit nations that managed to export their way out of their crises in much more favourable global economic prospects.  Some economists estimate that euro exit could cost Greece as much as half of the GDP on grounds of collapsing consumption and investment.

The abrupt stop of economic activity will have severe impact on the budget revenues and the government will need to cover this shortfall with additional money printing, further eroding the value of the new currency.

This collapse in domestic demand, combined with an only modest increase in exports, will eventually lead to unemployment levels significantly higher than the current 21.7% feeding the vicious cycle of lower tax and social insurance revenues, higher transfer payments and increasing budget deficit.

After two years of severe recession, loss of disposable income, disappointment to the point of desperation and growing anger, there is very little to suggest that the social fabric is strong enough to withstand this severe shock in a composed manner.  Social cohesion and democratic institutions will be tested.

Tourism, along with shipping the only substantial sources of hard currency in the country, is expected to take a further hit from the one already experienced this year with arrivals and revenues significantly lower as a result of the uncertainty around the country’s place in the euro zone.  The rebound of the Greek economy from tourism that many expect after the euro exit and new currency devaluation is overestimated.  There is higher probability that Greece for a period will be avoided as a destination in light of the uncertainty and the perceived hostile sentiment against certain European nations rather than take advantage of the cheaper touristic product that the country will have to offer.

From a macroeconomic perspective, should Greece decide to follow a euro exit path, could find itself within a matter of months having lost a substantial portion of its GDP, inflation in the region of 30%, unemployment much higher than the current devastating levels, a complete halt to investments further impacting the country’s competitiveness and large parts of the society, primarily the weakest, paying the high price with incomes and savings wiped out by an eroding from inflation new currency.

The entire spectrum of Greece’s political establishment agree on their intention to change  the course that the country has taken as a result of the EU/IMF austerity programs.  However, a potential euro exit will not necessarily have the desired result and it is highly likely that it will force the country even deeper into the recessionary spiral.

The dynamics in Europe are gradually changing after the election of a socialist president in France, the collapse of the Dutch government over new austerity measures to comply with targets, voices even within the European Commission speak of addition of growth inducing measures to compliment the fiscal pact.

Now is the time for Greece to ensure that it stays in the game, see how things will play out and putting political differences aside, form a unity government that will present a comprehensive national plan with the aspects of the program that require amendments and will give the country more room to breathe while it puts its house in order.

 Food for thought…



Written by Yiannis Mouzakis

May 14, 2012 at 3:52 pm

Posted in Economico

Tagged with , , , , ,

8 Responses

Subscribe to comments with RSS.

  1. There’s more to life than ‘staying in the game’, especially when ‘the game’ is forced on you … and it’s one you can’t afford to play. It’s always better to be a ‘game changer’ than simply a ‘pawn’.

    Jay Schwartz

    May 15, 2012 at 10:43 am

  2. Very one-sided article. First of all it only refers to Greeks as if life in EZ will keep on doing business as usual.
    The same fate for Greeks is reserved for Portuguess, Irish… and when the flame comes to Spain then… BOOM!
    Germans. Ohh the very rich Germans. 40% of german exports are headed to the EZ. But after the bust this 40% would vanish. This wouldn’t make Germans 40% poorer (as the article provises for Greeks), but it won’t make them richer either.
    Food for thought: it’s not a zero sum game. It’s a game where everybody loses.


    May 18, 2012 at 11:11 am

    • Thank you for the comment. The article is not one sided, it just focuses on the implications of a euro exit for Greece because our country is my area of concern.
      Surely a euro exit will have implications for eurozone, cost estimates vary as much of it depends on potential irrational reaction of people and the markets.
      However, the analysis of euro area impact is not the intention of the post. Just want to present without taking any political position that a euro exit for Greece, and particularly the weakest of the society, will be devastating.
      There should be no illusions around that and everyone needs to be aware that there is no easy way out of the mess the two main parties led the country in the last 3 decades.

      Yiannis Mouzakis

      May 18, 2012 at 11:28 am

  3. Maybe the Greece (as government) will run out of cash, but we forget about the private ~160billions € in deposits in the banks. And probably there a lot more outside the system.

    That large amount of cash will keep the country afloat for a while. The only issue is that the Greek Gov will forbid currency exchange with the drahma (but that’s just stupid as it sounds).

    Everyone is very interested in Greece these days, but not for the Greece sake. They just try to put Spain and Italy out of the stage lights. Greece will prevail one way or another.


    May 18, 2012 at 12:46 pm

  4. The choice is a free Greece in control of its own destiny or a puppet state in the control of the troika. The generation that brought this upon themselfs should accept a few hard years instead of selling their grandchildren futures to people that dont care about Greece. Germany and the other country are not borrowing money to Greece out of solidarity, lending money is bigbussiness.


    May 18, 2012 at 2:26 pm

  5. I have linked this article in my own blog because it is definitely the best description of a post-Euro scenario which I have read so far. My recommendation: translate it into Greek and distribute it to every household (and voter!).

    In the comments above I see reverberating some common themes of some Greeks living in a phantasy world (personally, and I am married to a Greek and spend about half the year here, I think that is a clear minority). Those themes are: Greece is a victim of foreign interests; a bad game is being forced upon Greeks; foreigners are taking advantage of Greece; etc.

    The one point which I agree with 100% is that Greece and Greeks should control their own destiny and assume responsibility for it. The last 2 years have shown that Greece really doesn’t want to help itself. Cutting government expenditures? Yes! But implementing major reforms so that the economy can perform well and generate value so that the government doesn’t need to cut expenditures so much? None of it!

    From the start of the crisis I have argued against a Greek Euro-exit. Because it would cause damage in Europe? No! (even though it would). Instead, I have argued this for all those reasons which are described in this article.

    From the start of this crisis I have argued that Greek leadership must take the initiative for bringing about change into its own hands in order to stay in charge of its destiny. Has it happened? No!

    Always putting oneself in the victim’s role and pointing the finger at others is childish. The solution to that is: grow up!!!

    Klaus Kastner

    May 19, 2012 at 8:22 am

  6. Firstly under the current bailout terms the target of 120% debt to GDP by 2020 cannot be kept, all the lastest figures show that deficit in increasing. Any renegotiation of the terms that will result from the June 17th election will only prolong a lesser austerity; it will take longer to become solvent and the ‘social fabric’ is unlikely to withstand either without extreme measures which may include use of the army.

    Secondly when Greece payed the bond on May 15 to those creditors who had NOT accepted the ‘haircut’ it opened the door to legal actions from those private creditors who had accepted the ‘haircut’. Strangely the PSI/’haircut’ bonds are now constituted under English Law and legal cases are starting that could potentialy reverse the 70% write off of private investor loans made previously leaving the terms of the second (March 2012) bailoutout terms, which required the private investor deal, invalid. Yes yes, all well and fine and lots of rich lawyers in London etc but the point is that the May 15 decision decreases to minimal any investor confidence. The second bailout was in any case mismanaged as the ‘troika’ were safeguarded at the expense of their people; debts to the IMF/EU/ECB still have to be repayed in full. (I was not, by the way, one of the private investors).

    Thirdly Greek banks deposits are falling everyday. I saw one estimate that €3bn a week is leaving when in March the total was €171bn. There is only so long this can continue depending how fast money leaves and how long it continues. With this situation time and money is literaly running out. The outflow could conceivably be reversed and confidence restored with a Greek ‘Marshall Plan’ or some such but Germany is not about to do this nor would it resolve the trade imbalance that underlies the whole euro problem. It would only buy time.

    There is, financialy speaking, only one answer and that is return to the drachma. The papers will say that in this scenario stopping money leaving the country is the most important thing. While this is important Greeces primary problem will be buying it’s energy requirements over the next 4-7yrs. The next Greek Government must agree a deal with EU to effectively subsidise Greek energy for a minimum and extendable period of 5 years. It could perhaps be reviewed if a recovery was faster. Such a deal would require the ‘troika’ to write off all the debts and subsidise energy requirements by aprox 35-40% for 5 yrs minimum.

    Various other renewal programmes could then be addressed such a new drachma Greek Investment Bank would be set up that would back inward investment on a ratios based on shareholding and viability. Many other schemes of this sort are feasible which would see Greece restored to solvency within 3-7 years depending on other conditions.

    Christopher Hawkins

    May 19, 2012 at 5:29 pm

  7. Game over is not far away….And the winner is…..Unfortunatelly NoOne at this time.

    Toula Charalambous

    May 27, 2012 at 6:32 pm

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: