#dnaEdit: Grexit game

The inevitability of Greece exiting the European common currency has become so much a part of European thinking that they have already coined an acronym for it: Grexit. That process might already have begun from last Thursday.

The European Central Bank’s (ECB) refusal to further bankroll Greek debts could set in motion the chain of developments which would culminate in the exit. In fact, ever since a new socialist government has been elected in Athens on the promise of ending the country’s austerity drive and structural reforms dictated by the ECB, European Commission and others, everything is moving towards the break.

The ECB has now stated that it will not accept Greece’s debt as mortgage. It has stopped fresh loans to Greek banks and other financial sector operators, excepting under a special emergency window. If the emergency loan window is stopped or suspended, which might well happen after a review due shortly, that would be the final parting of ways. 

Additionally, there is some cap on buying Greek treasury bills, which are short- term government bonds for raising funds. Without fresh funding the Greek government will run out of cash by the end of February, according to reports. This appears to be the upshot of the initial round of negotiations the new Greek finance minister of the country had in London, Frankfurt and Berlin over the week. At the end of the last meeting in Berlin, his German counterpart captured the outcome saying: “We have agreed to disagree”. The Greek finance minister is said to have denied even that. 

The consequences of Greece leaving the common currency system could be completely disruptive for the country. There are fears that Greek banks could face serious payments difficulties. Greece will have to go back to their national currency, the drachma. Exchange rate would be a hotly debated issue. But Greece will have a chance to make a fresh start.  With a depreciated currency, Greek exports could be competitive. It will be able to attract tourists — a major source of earning for the country. 

The access to the euro had bred profligacy and a lack of accountability. Greece’s debt had soared to unsustainable levels — currently at 175% of the GDP. Most of it is held outside, by central banks and banks in other European countries. Surely, Greece will not be able to access these sources of cheap funds for meeting its national expenses. It will now have to earn every bit of the expenditure it incurs. 

The crucial question is: what happens to the existing Greek debt? Those who are holding Greek securities would be left with the paper, not what these promise. Hence, something would need to be done to match the two.

Described in the financial world as a “haircut”, these exercises might turn out to be altogether shaving of the scalp. This large-scale financial restructuring of Greek debt would have to be undertaken. The repayment periods might have to be pushed back until the country comes back to a position when it can discharge its obligations honourably. 

There are some fundamental imbalances in the Greek economy and these cannot be addressed without massive efforts and some sacrifices by the new government and the people. It will not be an isolated affair. These developments will have an impact on the euro markets and the exchange rates are likely to be affected. Spillover effects could reach other countries, including India, at a later stage.