‘Grexit’ would be sudden, sharp and probably conducted in the dark of night; if Greece were to quit the euro, it would also mark the beginning of a long, hard road – for some harder still than the one already travelled.
The new leftist government wants to keep the country in the currency union, as do its eurozone counterparts. But if they fail to agree a deal to replace or extend a bailout programme that expires on February 28, Greece faces the risk of a euro exit – ‘Grexit’ in market shorthand – forced by bankruptcy and default.
Such a scenario would demand a rapid official response as remaining public confidence in the Greek economy evaporates. Capital controls would have to be imposed to stop an uncontrolled flight of cash abroad. They would come when banks and financial markets were closed.
Then the country would need a new currency, one that history suggests may initially be so weak that already cash-strapped Greeks and local businesses would lose much of their savings. This would be accompanied by a huge jump in inflation.
For a while, at least, Grexit may bring worse pain to the Greeks than the austerity policies imposed by the European Union and IMF, under which one in four workers is out of a job.
A devaluation would make some sectors more competitive; Greek holidays, for instance, would be cheaper for foreign tourists, but life outside the euro could still be tougher.
“The Greek economy was destroyed by the decision to anchor it to the euro... It was a political decision but now it is not easy to leave, to recreate something new,” said Francois Savary, chief strategist Reyl Asset Management.
“Do you think the 25 per cent of Greeks in unemployment can find jobs in tourism? Do you think the unemployment rate will even remain at 25 per cent (after Grexit)?”
Grexit would present many unknowns because the eurozone was never designed to be undone
Economists say leaving the euro would throw Greece into another deep recession, with a sharp drop in living standards and an even more severe fall in investment than now.
There is no precedent for Grexit, although Iceland, Cyprus and Argentina suggest what might happen.
Iceland has its own currency but imposed controls against capital flight in 2008 after the collapse of its overblown banking sector. Eurozone member Cyprus closed its banks for two weeks and also introduced capital controls during a 2013 crisis. Both countries still have some restrictions in place.
Neither was planning on changing its currency, as Grexit would imply. For that, Argentina may offer some hints: after earlier defaulting, it ditched in 2002 a currency board system under which it pegged the peso to the dollar.
The peso fell 70 per cent in the next six months, while the percentage of people under the poverty line more than doubled.
Grexit would present many unknowns because the eurozone was never designed to be undone. It is not even clear what kind of currency would replace the euro in Greece, whether it would be the drachma again or something else.
When the issue of Grexit arose the first time in 2012, it was suggested that euro notes held in Greece would be marked in some way to differentiate them from the real thing. A new currency would later be issued.
But there are all kinds of complications. What, for example, would happen to euros held by Greeks in accounts abroad?
Most Greek mortgages are held by local banks, so in theory there should be no change. But if euro loans were repaid in a devalued new currency, the lenders’ losses would be immense.
“(There) probably would be a completely paralysed banking system (after Grexit),” said Holger Schmieding, Berenberg chief economist.
More than 65,000 Greeks hold mortgages in Swiss francs. They have already been hit hard by the soaring franc that followed Switzerland’s lifting of its euro cap. Much more would follow.
Greece imports nearly all oil and gas and would have to buy energy priced in dollars or euros with the new currency.
Last year Greece paid €7.5 billion on energy imports, roughly five per cent of gross domestic product for the same period. A sharp devaluation could double that, without even taking account of a sinking GDP.
Apart from tourism and international shippers, beneficiaries of Grexit would include producers of olive oil, fruit, yoghurt, construction materials and perhaps pharmaceuticals whose exports would become cheaper.
But Greece runs a trade deficit of more than €16 billion, around 11 per cent of the current GDP.
Many wealthier Greeks are already believed to have moved their cash abroad, starting in 2010 and peaking in 2012. More recently, data suggests that money may be leaving bank accounts but staying in Greece.
“What’s happening in Greece is that people may be... keeping money under mattresses (or elsewhere),” said Michael Howell of CrossBorder Capital.
There is also a corporate divide. Asking not to be identified, an official at one company with international businesses said his firm began moving cash abroad in 2012 when Greece first almost crashed out of the euro. However, an official at a local company said its money remained in Greece.
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