May 172012
 May 17, 2012  Posted by at 6:46 pm Finance

As the possibility of Greece failing to establish a “pro-Euro” government and leaving the Union rises with every passing day, it is helpful to consider, to the best of our ability, the potential consequences of such an event. Business Insider has compiled a ROUGH guide to such consequences based on the past few months of analysis from various sources. I emphasize the word “rough” because none of these things are certain, and all of the “analysts” of this Greek tragedy are little more than curious speculators at this point (that includes me).

Still, it is very likely that at least a few of the following 14 things will come to pass in some way, shape or form. I chose to leave out three slides from the original article, but you can see them all by following the link in red. Here is Simone Foxman with the potential consequences:

GET READY: This is What Happens If Greece Exits the Euro


1) Greece passes exchange rate laws for a new drachma: “Grexit would effectively start with the urgent passage of a currency law through an emergency decree by the Greek government of the day,” explained Citi chief economist Willem Buiter. The move would stipulate that Greek currency is legal tender, and stipulate one or more conversion rates on assets.


2) Greece would have to pass laws preventing outflow of deposits: “In our view, it is highly likely that Grexit would be accompanied by the imposition of strict capital controls. True, the Treaty (Art. 63) forbids any restrictions on capital or payment flows between EU member states, but we think that an exiting country, facing massive disruptions in its international capital account transactions would need to impose strict capital and foreign exchange controls following exit if some semblance of financial order is to be maintained,” Buiter wrote in a note describing a Greek exit in February.


3) Mistrust in the new currency would also create a massive black market: Greeks already do an estimated 25 percent of their business outside the law so they do not have to pay taxes. eFXNews wrote that this will probably result in an exchange rate significantly different from the one the offered by the Greek Central Bank.


4) The new drachma would collapse in value against other currencies: “While currency devaluation provides long-term opportunities for Greece to increase competitiveness in global markets, it can also produce a short-term nightmare. Rapid inflation of prices will destabilizing Greeks’ way of life, as prices soar on even the most basic goods and the savings of a lifetime evaporate over night. The key to managing this is stalling the new drachma’s free-fall is a carefully managed money supply, but the allure of printing more cash to maintain government services could lead to hyperinflation.



5) Political unrest could ravage Greece: “The Greek Minister of Civilian Protection, Michalis Chrysohoidis said in an interview recently that Greece “will end up in civil war” if the country exits the euro. Sav Savouri, chief economist at the London-based hedge fund Tosca Fund, also told Capital.grthat a “collapsing civil society” in the wake of a euro exit could lead to a military coup: “In every instance where that΄s happened the military will take over the role of government.”


Greece has already been racked by violent protests in the wake of austerity measures, and an even sharper economic downturn could turn severe dismay into protests on the street.


6) Euro area national central banks and the European Central Bank would stomach big losses, threatening their solvency: The graph (below) shows the scale and maturity of ECB and NCB holdings of Greek debt. While it would be difficult to actually render the ECB insolvent, such losses would nonetheless alarm investors worried about its credibility. Further, NCB exposure to the Greek central bank via TARGET II transfers—which allow NCBs to fund bank withdrawals with money not currently in the country—will likely result in even deeper losses.



7) According to UBS Greece would see a 50% collapse in GDP: From a report published last year – “The cost of a weak country leaving the Euro is significant. Consequences include sovereign default, corporate default, collapse of the banking system and collapse of international trade. There is little prospect of devaluation offering much assistance. We estimate that a weak Euro country leaving the Euro would incur a cost of around EUR9,500 to EUR11,500 per person in the exiting country during the first year. That cost would then probably amount to EUR3,000 to EUR4,000 per person per year over subsequent years. That equates to a range of 40% to 50% of GDP in the first year.


8) Fear (contagion) would spread across the eurozone, hurting banks and governments alike: An increasingly bearish private sector is already beginning to price in the losses it would take during a Grexit, with more and more analysts, investors, and even politicians beginning to believe this is inevitable. Even so, a Greek exit would probably be a prelude to another debt restructuring, as the country still won’t be able to borrow to pay off its debts. This is obviously a negative for banks.  

At the same time, worrisome sovereigns—in particular, Italy, Spain, and Portugal—are likely to have even more difficulty in finding investors willing to purchase their bonds.


9) The ensuing fear could cause a major outflow in deposits in Italian and Spanish banks: Societe Generale analysts predicted that a Grexit could cause a 20-30 percent outflowin already hard-hit Italian and Spanish banks if the ECB doesn’t take drastic measures – “Absent a major intervention by the ECB, the Italian and Spanish banks will then have to (i) de-lever their balance sheet to offset the reduced deposit availability, (ii) de-lever further to a 110% loan/deposit ratio to mitigate the continued drought in the wholesale funding market and (iii) offer materially higher rates on the remaining available deposits in the market. We assume for the purposes of this analysis that the Italian and Spanish banks will not repay the LTRO early and that the ECB will prolong the LTRO from 3 years to 5 years.”


10) But managing a Greek exit could prompt the ECB to adopt measures that move towards fiscal integration of the euro area: The Eurasia Group’s Mujtaba Rahman suggested in a recent note that dealing with a Grexit could force the ECB to take important steps towards financial integration, the very steps it has refused to take so far, in order to maintain euro area stability – “In such circumstances, our view is that the ECB would essentially undertake a two-pronged strategy: in the first instance, it would support the Greek banking system while also undertaking large scale SMP interventions in other at-risk sovereigns (the potential for an OSI down the road on the ECB’s SMP could also be contemplated to overcome the problem of subordination). The financial support to at-risk sovereigns would also be complemented by a political statement that commits the ECB to an explicit lender of last resort function (given it would be necessary for the market to attach credibility to the ECB’s actions). However, in order to support Greece in this way, the ECB’s governing council would look for some form of guarantee that Greece’s exit is-to the extent possible-part of a managed process. Indeed, while such a situation could also merit the introduction of joint and several Euro bills for issuing short term debt for all countries bar those in a program (for example countries have access to a fund that issues short term debt as long as they comply with SGP norms), this would most probably still be unlikely.”


11) Rescuing the European banking system will likely involve spending more money on Greece: From a recent column by economist Nouriel Roubini – “Losses that eurozone banks would suffer would be manageable if the banks were properly and aggressively recapitalized. Avoiding a post-exit implosion of the Greek banking system, however, might require temporary measures, such as bank holidays and capital controls, to prevent a disorderly run on deposits. The European Financial Stability Facility/European Stability Mechanism (EFSF/ESM) should carry out the necessary recapitalization of the Greek banks via direct capital injections. European taxpayers would effectively take over the Greek banking system, but this would be partial compensation for the losses imposed on creditors by drachmatization.”


12) Other analysts are skeptical that EU leaders will take the necessary steps to stop the effects of the crisis from affecting the rest of Europe: A Greek exit would just affirm that “EA creditor countries undoubtedly view the cost of providing unconditional and/or unlimited or open-ended fiscal and financial support to fiscally vulnerable EA countries as a price not worth paying to keep a single non-performing EA member state in the club,” wrote Buiter last year.


Although the ECB has the power to take some action, the massive liquidity measures it undertook earlier this year only prove that throwing money at the eurozone’s problems only goes so far.


13) The euro would also devalue in the short-term, although by much less than would the new drachma: A Greek departure from the euro area would immediately drive investor fears that more countries could leave the euro area. That, and the likely inflationary consequences of ECB action, are likely to devalue the euro against other major currencies in the short-term.


“Heightened risk aversion (including, at least temporarily following Grexit, an increased fear of future more wide-spread EA break-up) and some flight to safe- havens outside the EA, as well as likely additional easing measures by the ECB in a Grexit scenario imply that the euro would likely fall relative to the dollar and other safe-haven currencies, such as the Swiss franc, the Japanese yen or even Sterling,” wrote Citi’s Buiter.


14) Another Greek Default could result in protracted legal battles with foreign lenders: Greece’s failure to pay off its debts could result in decade-long legal battles, particularly if it decides to pay some creditors and not others.


So-called “vulture funds” which specialize in speculating on troubled sovereign debt and then sue when they don’t get paid are likely to instigate legal battles to make sure that Greece meets its commitment. Dart Funds, which recently received approximately €390 million ($95 million) in maturing Greek debt it purchased on the cheap, is still embroiled in a legal battle with Argentina after the country defaulted in 2002, according to the New York Times.

Home Forums Potential Consequences of a Greek Exit

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    As the possibility of Greece failing to establish a “pro-Euro” government and leaving the Union rises with every passing day, it is helpful to conside
    [See the full post at: Potential Consequences of a Greek Exit]



    Hard to believe Greece leaves the Euro. Far more likely it is Germany. Once Greece exits, it is all over for the other PIIGS, Belgium, France, and maybe even The Netherlands.

    Not that there are any easy fixes, but ‘Austerity’ has been voted down. It’s really not even on the table any more.




    There are a couple of other aspects here that aren’t really discussed.

    The first is that Greece leaving might affect Euro supply and thus lead to inflation in Europe even in the absence of other crisis factors. the Euro may be somewhat devalued just because of the fact that you have more Euros for a slightly smaller economic unit.

    The big risk that is missing in this article though is that the reason you’d see deposit withdrawals in Spain and Italy is that there would be a very reasonable sentiment that these countries were heading towards withdrawal as well. And if Spain or Portugal goes, then what next?

    A spreading crisis of withdrawal from the Eurozone would devalue the Euro drastically. It isn’t clear to me whether the Euro would, over the course of the next few years, fair better than the Drachma. That would depend on how contained the crisis is. If the Euro starts to get in bigger trouble though, would Germany stay in the union?

    Basically you could have a death spiral of the Euro taking place after a Greek exit.



    Here is the key phrase that is being kept out of the discussion.

    … mutually assured destruction…

    The Greeks have a bigger gun that the EU


    pipefit post=2985 wrote: Hard to believe Greece leaves the Euro. Far more likely it is Germany. Once Greece exits, it is all over for the other PIIGS, Belgium, France, and maybe even The Netherlands.

    Not that there are any easy fixes, but ‘Austerity’ has been voted down. It’s really not even on the table any more.

    Agreed, “Austerity” has been voted down, but implicitly also the alternative to Austerity of further financing an unsustainable economic system has ALSO been Voted Down. If there is some 3rd Option between Austerity and just Printing Money to finance the economy, I do not know what that is.

    From my POV, a New Drachma is a Non-Starter. I don’t see what the Greeks have to back this up besides Olives and Feta Cheese, and I don’t think the Export Market for EITHER of those is all that good right now.

    If the Greek Central Bank RESTRICTS issuance of Drachma so as not to ruit into an HI event, then the Greeks can’t pay Pnesioners and Civil Service sectors with it, they’ll be as hamstrung as with the Euro.

    I am CONVINCED if the Greeks issue New Drachma, the notes will HI at least as fast as Zimbabwe Notes did.



    Golden Oxen

    “From my POV, a New Drachma is a Non-Starter. I don’t see what the Greeks have to back this up besides Olives and Feta Cheese, and I don’t think the Export Market for EITHER of those is all that good right now.” What did they have to back their currency before this silly Euro experiment? It appeared to be a functional currency. Greece will survive a massive devaluation of it’s currency if it goes back to it, much like Argentina,Mexico, Brazil etc. This end of the world decent into hell talk, if you default, is bankster propaganda. Don’t get me wrong it will not be pretty for a spell, but Greece will survive and the world will still spin. Come to think of it Zimbabwe is still on the map and somehow functioning. That printing orgy they had there made the other hypers look like a friendly game of Monopoly.



    “If there is some 3rd Option between Austerity and just Printing Money to finance the economy, I do not know what that is.”

    I think this is what all the stalling is about. They are looking for ‘the third way’. If they had even a half baked strategy they would have tried it by now.

    What is really scary is how lame the interim moves have been these last several years. Compare that to the Fed. I thought their ‘operation twist’ was a pretty clever way of muddling through another year without having to call it ‘QE-3’ during an election year, even though that is basically what it is.

    Not that ‘twist’ is a solution at all, but it seems to be politically palatable, and it appears to be buying a little time. On the other hand, the EU boys are just about out of time, it seems.

    Surely you have noticed how gold/silver have decoupled from the stock market the last couple of days? SPX has been down the last two days, continuing the decline almost every day in May. Gold and silver had been declining with the SPX in lockstep, until yesterday, and they are up big two days in a row.

    What to make of it? Could just be short covering in the metals. But, consider. Gold and silver rallied, the dollar appears to be topping, and interest rates are still falling. And the market keeps dropping. And the overhyped Facebook IPO is a bust.

    I’d say that this market is in huge trouble, except gold, which might continue to decouple. The reason I’m bullish on gold is that a. I’m a gold permabull (full disclosure, lol) and b. silver also decoupled the last two days. That is horrible news for everything else, …….


    Golden Oxen

    @pipefit. Glad to meet another gold perma bull, a rare breed for sure. Have been long gold and silver for over forty years. Hang in there pipefit. “Gold Will Win.” My opinion of the decoupling this week was the manipulative short sellers, Morgan and G Suchs and company, have been tipped of a big reflation imminent. This next print should be a real doozy, especially with the deflation fairy tale getting a lot of press lately.

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