http://edition.cnn.com/2012/05/17/business/greece-euro-exit/
1931 óta nem látott bankcsődőket is láthatunk, de Európában remény mindig van
London (CNN) -- The once-taboo topic of Greece's exit from the common currency is now being openly discussed. Two years of pushing cash into the country have barely kept it afloat and the collapse of political talks this week injected a new urgency into the situation.
The potential for a run on the banks
increased with the admission
by the country's president Karolos Papoulias that around €800 million ($900
million), was pulled out of the banks Monday. It is a tiny slice of total
deposits but a trend, Papoulias noted, that could create "fear that could
develop into panic."
Greece, which is facing its fifth
year of recession, will go to a second election June 17 after its May 6 voting
left no single party with more than 20% support and negotiations to create a
unity government failed. An interim
government has now been sworn in.
An unplanned exit from the eurozone
could cost up to $1 trillion, according to Doug McWilliams, of the Centre for
Economics and Business Research. According to McWilliams, "the end of the
euro in its current form is a certainty. A currency with the name euro may
survive but even if it does it will be radically transformed."
Negotiations between Greece and its
lenders might seem a game of chicken, and analysts remains skeptical the
end-game is near. But the odds are increasing -- gaming house Ladbrokes even
stopped taking bets on a Greek exit from the eurozone -- despite the legal,
financial and political difficulties. CNN explains how it could happen.
Legal hurdles
Greece could be forced
to exit the European Union, rather than just the common currency itself,
because one comes hand in hand with the other. The European Central Bank has
the exclusive right to issue euro notes, for example, so any move by Greece to
print its own currency would immediately put it in breach of the treaty.
Changing the treaty would take some time, so a more likely maneuver is an
agreement between euro nations on when and how they would boot Greece out of
the bloc.
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German lawmaker: Play by EU rules or go
According to Charles Proctor, partner
at Edwards Wildman Palmer, "the dam has burst, because so many people are
now talking about [an exit]. It is not a possibility that can be ignored."
However the legal difficulties mean
"any solution would have to take place effectively outside this
document." A withdrawal from the eurozone by Greece "would be breach
of the treaty without any question," Proctor added. "But these things
happen."
Getting back the small
change
What's next for Europe
and the eurozone?
Greece could revert to the drachma
-- the currency it had before entering the euro in 2001 -- but there is also
speculation it could operate with a Greece-specific euro until a full switch
can take place.
If Argentina is used as a guide,
this could be announced over a weekend. The banks could then remain shut for a
fortnight while the currency transition is bedded in.
At this point capital controls would
need to be in place to ensure money in the country stays there. This could be
done in co-ordination with other euro countries, or unilaterally.
According to a Bank of
American/Merrill Lynch note, Greek banks have lost 30% of their private sector
deposits since their peak in late 2009. Such capital flight is likely to be
increasing and the fear -- as articulated by Papoulias -- is that an emotional
response to the crisis will create even greater problems.
As UBS's Paul Donovan, notes, "talk
of firewalls and guarantees disappears in a puff of smoke if the challenge for
banks is not liquidity, nor solvency, but an existential crisis."
The new currency would be worth
significantly less -- estimates put it perhaps 50% -- than the euro. According
Bank of America/Merrill Lynch, the country could then issue IOUs to pay
salaries and recapitalize the banks. This, however, would risk the creation of
a "shadow currency." The note adds: "How long Greece could be
within the euro and live with its own internal currency is an open
debate."
Once the new currency is in place,
mortgages to Greek banks would likely be repaid in drachma, while repayments of
mortgages to foreign banks may have to be renegotiated.
The biggest issue could be foreign
banks' loans to major Greek businesses. Debt which was previously due to be
repaid in euro which have be renegotiated in drachma. Legal disputes are likely
to ensure as creditors battle to get back as much money as they can.
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Swedish
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Creditors attempting to squeeze
their money out of Greece could be out of luck. The International Monetary Fund
and European Central Bank are the country's most senior creditors and
defaulting on these debts would be politically unpalatable. But there are
precedents: Sudan, Zimbabwe and Somalia, for example, remain in arrears to the
IMF.
Private creditors have already taken
50% losses on their investments in Greek debt but are likely to face further
reductions in repayments. Money owed to Greece's eurozone peers, via the
bailout fund, would likely be up some ferocious negotiation.
The flow-on effect
The so-called "contagion
effect" remains the greatest fear. Allowing one country to exit the euro
opens the floodgates for others to follow. This risk will push up the premium
attached to buy sovereign debt of troubled eurozone economies -- such as that
of Spain and Italy, whose ten year bonds are nudging toward the "danger
zone" of 7% yield -- on the back of the uncertainty.
According to Michala Marcussen, of
Societe Generale, the direct costs of Greek euro exit would be huge for Greece,
but manageable for the rest of the bloc. "Our concern is contagion,"
she wrote in a note. The note said a forceful policy response would be needed
in the case of a Greek exit, such as further strengthening of the bloc's
bailout fund.
A Greek exit could also trigger
shifts in geo-political influence, as countries such as Russia may step up with
financial assistance. According to James Nixon, of Societe Generale: "The
risk is we may lose Greece from the Western sphere of influence."
Is Greece actually going to
exit the euro?
The next few weeks will be vital for
Greece, and the future of the eurozone. Much depends on the results of the new
election.
Greece's
Syriza party -- which wants to remain in the eurozone but does not support
the bailout program -- has thus far reaped the benefits of voter frustration
with the austerity measures. It bumped out mainstream party PASOK to come
second in the May 6 election, with almost 17%. Opinion polls indicate it could
come first in the next election.
New Democracy, which supports the
program, narrowly won the May 6 election with almost 19% support. It could get
a boost if sentiment shifts and fear of a euro exit drives Greeks back to the
mainstream parties. If this happens, the crisis could ease.
Economists remain unconvinced an
exit is the next step. Nixon believes the "huge poker game" between
Greece and its creditors is set to continue. "There is still some distance
to the last chance saloon," he says.
If it did, the consequences could be
dire, Donovan notes. He points to the bankruptcy of Creditanstalt, Austria's
largest bank, in 1931. "That was the main cause for the Great Depression.
And this is the same sort of thing," he says.
Economic shakedown
A new currency would take some time
to find its true value, as markets adjust to Greece being outside the eurozone
bloc.
In Argentina's case, its break with
the U.S. dollar peg in 2002 -- which devalued the peso by 30% -- sank its economy,
with 60% of Argentines under the poverty line, according to the CIA Factbook.
However, the economy then rebounded around 8.5% annually for six years.
If
Greece unshackles its currency it will become a more competitive exporter
and an attractively cheap tourist destination. But Greeks, who have suffered
rising unemployment, brutal austerity measures and protests
which have claimed lives, will be forced to pay higher prices for imported
goods. The country's economy -- which accounts for just 5% of the European
Union's economic output and relies on agriculture and tourism -- would likely
take years to recover.
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