WHAT WOULD HAPPEN IF GREECE LEFT THE EMU?
I have often said that Greece would be able to better serve its citizenry in the long-term if it regained its monetary sovereignty by leaving the EMU and restructuring its debt. ING recently detailed a potential scenario should that occur. According to ING, while the results would be harmful, they would not be the end of the world as many presume:
1. Scenario I: a ‘stage-managed’ exit of Greece
- At the mild end of the spectrum, the most plausible scenario is that Greece is the only country to exit the Eurozone.
- Greece is the most challenged from a solvency and a competitiveness perspective, and it is most observers’ favourite candidate for leaving EMU.
- The modest size of the Greek economy means that its departure would be far less disruptive than if one of the bigger economies were to leave.
- Our assumption is that Greece’s exit does not happen in a chaotic manner. The Eurozone and IMF would provide medium-term funding to ease the pain of Greece’s exit.
- The Greek exit gives further impetus for reforms in other highly-indebted countries such as Spain and Portugal.
in scenario 1, Greek exit, the impact is clearly heaviest in Greece itself, there would be non-trivial effects on the rest of Europe. Greece suffers a deeper recession in 2011 than in our baseline, with GDP 7½% lower. Other Eurozone countries suffer falls in output of up to 1%Given Greece’s large twin deficits we see the new Greek Drachma falling 80% against the EUR.
What would be the impact on specific markets?
- Credit spreads in core countries widen but less than their periphery counterparts. General spread widening is muted in comparison to the credit crisis of 2008.
- Nonetheless, even core German corporate credit spreads widen by 90bp in 2010.
- Contagion sees spreads rise by some 130bp in other peripheral markets for A rated corporate debt. In terms of BBB ABS the periphery sees spreads blow but by 200bp in RMBS, 400bp in credit cards and 700bp in auto loans.
- But none get close to credit crisis peaks. Later in 2011 there is some retracement, but not towards current levels.
Source: ING
And what is the scenario if Illinois left the US ?….
Quid of the hundred of € billions of greek government bonds held by Europeans banks?
The losses would have to be recognised this time and wipe out their capital.
The loss of Greece would weaken the political credibility of the Eurozone and confidence in the currency that it supports, as the markets would be watching for the next Greece to emerge. It would also compromise EU expansion plans, which have been facilitated by the prospect of giving Eurozone membership to other small nations that also have small economies and are somewhat behind the curve in economic development. The long-run political prospects of the EU could be greatly harmed by it, and it would be too late to reverse it if the Greek cat were to be let out of the bag.
Then there is the banking problem. At the very least, there would need to be an ECB- managed workout plan for the banks ala TARP, which would require money, and perhaps more importantly, political will that could be tough to muster during this latest austerity fad that has gripped Europe.
It really doesn’t matter what Greece does they are screwed regardless. I’m in Greece now, and the corruption is simply staggering. A man actually escaped from prison twice via helicopter as amazing as it sounds…and no it wasn’t A-Team like either. Everyone here is on the take and the country’s political “middle” would be like a Chuck Schumer or maybe even Hillary. The way this country operates and the attitude held by the citizens here will NEVER allow them to escape EVER. I’m not sure if I can be any clearer on the subject. Kicking the can down is Greece’s best case scenario.