No drachmas for Greece, unless there’s a tragedy
Over the past week, the word Grexit has been thrown about. It’s a term coined to describe a Greece exit from the euro. But will it actually happen?
Only last week German Chancellor Angela Merkel said that Germany wants the country to remain in the bloc. But recently, financial leaders from the European Central Bank (ECB), International Monetary Fund (IMF) and various Heads of State have broken their silence, and publicly commented on such a move. It’s something they avoided for fear of an overreaction on global share markets.
But investors are certainly pricing in the possibility, as they sell out of risky assets like the Australian dollar which fell to below parity with the greenback. The Australian share market lost more than $100 billion dollars last week.
The biggest factor for Australia is China, which is seeing an economic slowdown, much of which has to do with Europe. China exports around 25 per cent of its goods and services to the eurozone. If demand drops, its economy shrinks and in turn, China will demand less goods and services, especially commodities from Australia.
Economists at ANZ say there is a 25 per cent chance of an orderly Grexit. Experts at NAB forecast a 50 to 60 per cent chance.
It could be worse, ANZ, has a 1 per cent chance of a disorderly Grexit which would ultimately see the break up of the eurozone. A split is highly complex and unprecedented.
The IMF’s Christine Lagarde says any move that would see Greece out of Europe’s single currency would be considered extremely expensive and would pose great risks.
If Greece was to return to the drachma, an uncontrolled default on euro-denominated debt would be triggered, because many economists believe its old currency has devalued by around 40 per cent against the Euro.
That’s good news for tourists, but generally bad for the people of Greece. As a result, many Greeks have withdrawn their cash from their own banks, and reinvested it outside the Hellenic State. Athens meanwhile, only has around $2 billion cash on hand.
A Grexit would see the EU and IMF, which lent money to Greece would lose out, and so too would the European Central Bank along with foreign creditors of Greek companies, banks and ultimately the people of Greece.
For the rest of the zone, the biggest concern is that of contagion to Portugal, Spain and Italy, which is why bond yields in these countries, are under so much pressure.
It will be up to the ECB and IMF to move quickly and use its recently bolstered up firewall bailout fund to buy up bonds in these vulnerable countries to limit the fallout.
Commsec makes an interesting point though. Greece’s economy, at $275billion, is virtually the same size as Chile and Nigeria. If those countries faced similar economic stresses, would they receive the same amount of investor or media attention? As part of a greater trading bloc, Greece does seem to command more importance.
This week, Europe will once again be the focus of the market, with very little local or regional corporate or economic to provide direction. Eurozone leaders will meet on Thursday to discuss alternatives for Greece which may include an easing in the pace of fiscal austerity, and of course, the possibility of Grexit.
The country’s June the 17th elections will be the turning point.
Insight will discuss the state of play in Greece on the program tonight, 8.30pm on SBS ONE, with politicians, economists and ordinary citizens talking about whether tough economic medicine is the right approach, and how backlash in Greece will impact other countries.
Ricardo Goncalves is a presenter and business journalist at SBS World News Australia. Follow him on Twitter @BUSINESSricardo.
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