THE END GAME IS APPROACHING FOR GREECE

Greece is € 323 billion in debt- more than 175% of its GDP. It cannot pay what it owes to the other European countries and the European Central Bank. Greece will run out of money by 30 June unless creditors release an additional € 7.2 billion in bail-out funds.  Greece must pay the IMF 1.54 billion euros by June 30, which is also when its bailout agreement is due to expire. It does not have access to international credit markets and without the bailout money, it would have to default on its debts. A disorderly default would likely mean Greek banks could no longer rely on funding from the European Central Bank, which is the only thing keeping them afloat. Failure to reach a deal would mark the beginning of a painful course that would lead initially to a Greek default and ultimately to the country's exit from the Euro and most likely from the European Union. If Greece is expelled or otherwise forced to drop out of the eurozone, the consequences would be catastrophic and far-reaching.

Greek Exit Scenario

1. Impact on its New Currency

If Greece leaves the euro zone and introduces a new currency (presumably the new drachma), it will depreciate massively against other currencies, due to capital flight, a collapsing banking sector and a complete breakdown of business activity. The new drachma will lose 80% against the euro in the first few days. This will have positive effects on the price competitiveness of Greece’s exports (such as tourism and the shipping industry), however, the disadvantages will outweigh these benefits. Inflation will soar to record levels as prices for imported goods (such as oil, machinery and consumer goods) will rocket. Greece has almost no industrial sector or natural resources and thereby has a high import bill. Standards of living will decline for the vast majority of the population as imported goods will become unaffordable. From a business point of view, Greek producers which import a large share of their input factors will face problems; as a consequence supply chains will face problems.

2. Impact on the Greek Financial Sector

A Greek exit from the euro zone will have devastating effects on the domestic banking sector. Because Greek households fear a collapse, they have massively withdrawn their deposits. Households are also afraid of a forced exchange of their euro-denominated deposits in new drachma-denominated deposits at an extremely unfavourable rate. The Greek banking sector can no longer raise funds from domestic markets and now depends largely on the ECB. If Greece leaves the euro zone, this last source of finance will be eliminated and the whole banking sector will collapse. This is made worse as Greek banks still hold a substantial amount of Greek government bonds, which will be worthless: a Greek exit from the euro zone will only happen if the government defaults on its government debt. Greek banks will be heavily impacted by such a move and face extremely high write-offs. Without external help (e.g. from the IMF), a Greek exit from the euro zone will lead to a collapse of the domestic banking sector, with unforeseeable but unquestionably severely harmful effects on doing business in the country.

3. Impact on Greece’s Public Finances

If Greece decides to leave the euro zone and defaults on its remaining government debt, the long-term consequences might be positive. Currently, Greece’s government debt amounts to 177 % of GDP. This is unsustainably high, and even if it complies with the EU plan, Greece will still have debts of more than 120% of GDP in 2020. If the debt-to-GDP ratio falls significantly due to a default, Greece can slash interest-rate payments and invest this money in infrastructure and its educational system, thereby increasing the long-term growth potential. However, these benefits will only materialise (if ever) in the long term. In the short term, a Greek default and exit from the euro zone will stop financial aid from the Troika, the main source of finance. If the aid flows stop, the need for a sharp fiscal adjustment increases even further as other sources of finance do not exist; a default will close the door to the financial markets for many years. Even tougher fiscal adjustment (more spending cuts and tax increases) could lead to civil unrest, which, in a worst-case scenario, could interrupt business activity completely and interrupt international supply chains.

4. Effect on Cross-border Trade

EU law does not deal with an exit from the euro zone. According to the opinion of the legal service of the EU institutions, the only way that Greece can leave the euro zone is by leaving the EU. Therefore, a Greek exit from the euro zone will also impact the legal framework for cross-border trade. Even though Greece could, theoretically, apply for membership in the EU again, it seems likely that the country will have to stay outside the EU for a while as the re-accession procedure (an unprecedented event in the EU’s history) will take some time. Therefore, exports to and imports from Greece could face tariffs while the free movement of capital and labour force is no longer guaranteed. As a consequence, cross-border trade and investment will become more complicated and the expected returns will become more uncertain.

To conclude, a Greek exit from the euro zone will lead to:

•  the collapse of the domestic banking sector;
•  complicated and higher costs for cross-border trading;
•  a sharply depreciating new currency;
•  higher inflation; and
•  increased austerity measures, which could trigger civil unrest.

The beneficial long-term effects and the higher price competitiveness of export sectors will not outweigh these negative effects. Overall, the Greek economy will face a sharp downturn after the departure from the euro zone.

 Consequences for Euroland

The consequences of a Greek exit from the euro zone will remain manageable for the rest of the euro area, and it is likely that the developments can be contained to Greece.

Effects on Euroland’s Financial Sector

European banks have reduced their exposure to Greece significantly. The European banking sector has access to sufficient levels of liquidity. Nonetheless, if Greece’s leaves the euro zone, significant write- offs of Greek debt will reduce profitability of European banks and will have a negative impact on credit growth as banks rebuild their balance sheets (and thereby payments performance and credit risk). In addition, a Greek departure from the euro zone could also trigger bank runs in states like Portugal and Spain, which would require additional emergency liquidity injections by the ECB.

Outside the euro zone, a Greek exit from the euro zone (triggering a collapse of the Greek banking sector) will have a severe impact on the Balkan region, where Greek banks are active. Greek banks (via their local subsidiaries) hold a substantial share of banking-sector assets in particular in Romania, the Former Yugoslavian Republic of Macedonia and Bulgaria. This will fire back when the Greek banking sector collapses.

2. Effects on Euroland’s Macro-economic Outlook

If the harmful effects of a Greek default and exit from the euro zone on the European financial sector and bond markets (especially in Italy and Spain) can be contained successfully, the overall impact on the euro-zone’s macro-economic outlook will be relatively small.  It is estimated GDP growth in the first three years after the break-up will slow in all euro-zone economies: 1.5 percentage points (for the three years combined) lower in Germany to 2.0 percentage points lower growth in Italy, Spain and Portugal. Outside the euro zone, the UK would lose 1.9 percentage points of growth while the US will lose 1.7%, given their trade links and financial exposure to Euroland. The British pound and the US dollar will experience an appreciation against the euro which will lead to a loss of price competitiveness. With economic activity slowing and unemployment rising modestly, there will be beneficial effects on the inflation rate (without causing deflation) in the years after a Greek exit, bringing the inflation rate close to the ECB’s target of 2.0%.

Greek Debt : € 323 Billion

• International Bailout Funds: € 246 Billion (76%)
• Bank of Greece: € 4.3 Billion (1.3%)
• Other Loans: € 10.5 Billion (3.2%)
• Other Bonds: € 48.8 Billion (15.1%)
• Foreign Banks: € 2.4 Billion (0.7%)
• Greek Banks: € 11 Billion (3.4%)

Bailout Breakdown (€ 246 Billion)

• International Monetary Fund: € 32 Billion (13%)
• European Central Bank: € 20 Billion (8.1%)
• Germany: € 56 Billion (22.8%)
• France: € 42 Billion (17%)
• Italy: € 37 Billion (15%)
• Spain: € 25 Billion (10%)
• Other Eurozone: € 34 Billion (13.8%)