Grexit, or not? That is the question

Greece collapsed in a deep economic crisis in 2009, when the Greek former Prime Minister, George Papandreou, revealed a large gap in Greece’s accounts, with a year deficit of 12.7% of GDP, four times more than the Eurozone’s limit. Then, the European Commission condemned Greece the falsification of data about its public finances to guarantee the entrance and the permanence of the country in the monetary union. It has led to a growing feeling of distrust towards the country’s economy because it showed an increase of public debt, which was soon downgraded to junk bond by the rating agencies, with relevant consequences on the financial markets.

Since then, all the countries of the European Union have joined the forces with the International Monetary Fund, to save Greece from the default, which can affect the rest of Europe. In 2010, a €110 billion loan was approved over three years and an austerity package. Meanwhile, all the rate agencies like Moody’s, Standard and Poor’s and Fitch, cut even more the Greek rating from CAA1 (insolvent) to CCC (debt highly speculative) to CC (vulnerable). For its part, the Greek Government started to make cuts and to introduce new privatizations to obtain other loans. The unemployment rate grew to the 15.9% and the social order began to tremble, since the new financial measures resulted in job insecurity or public dismissal, new taxes on property and new pension cuts.

The economic crisis became also a social one: during February 2012, the risk of a default began to be a reality because the political parties did not find any agreement and new cuts to the public spending were made. The population took to the streets to protest. Fortunately, the default was avoided once again thanks to a new loan approved by the Troika, but the rating agencies were not so indulgent with the country: Standard and Poor’s marked down the rating to SD (Selective Default), and Fitch to RD (Restricted Default). The retail investors were not so inclined to restructure the debt, but the private creditors decided to adhere to a bond swap operation helping Greece to fill up part of the debt. Nevertheless, Moody’s consider the Country already on default. New bonds were issued and the rating were bring to “B- with a stable outlook”.

In May 2012, the perspective of the Greek withdrawal from the Eurozone, known as Grexit, became real. Fitch cut once again the rating to CCC (substantial credit risk) and forecast a capital flight. At the end of 2012, the Ministry of Treasure did a buy-back operation on the debt and succeed in buying Government bonds, reducing the debt.

In January 2015, everything changed: the new general elections were won by Alexis Tsipras, leader of the left-wing political party SYRIZA. The debt and the risk of a default remains as a black shadow on the country who tries to face the crisis by supporting the claims of a party, which was on the opposition. Tsipras, as Prime Minister, continued his struggle to reconstruct the Eurozone based on the principles of social cohesion and democracy, asking for a reduction of the payment of debt to the Troika. One month after his elections, the Eurogroup brokers an agreement to obtain an extension of the loans for four months. At the beginning of June, Greece asked to IMF to postpone the payment of the installment and on 27th of the month, PM Tsipras announced a referendum on a bailout agreement, which was approved by the Greek Parliament. The banks remained close and Greeks started to queue outside the banks to withdraw some cash in a very surreal atmosphere. On July 5th, the referendum was held: the electors expressed their preference on accepting or not the plan proposed by the international creditors in exchange for a new financial supporting program. The options were to accept the draft of an agreement submitted by the European Commission, ECB and IMF: “Reforms for the completion of the actual program and beyond” and “preliminary analysis for the debt sustainability”. “No” (Greek: Όχι) won with the 62% of votes. After that, on Monday 6th, the Ministry of Finance Varoufakis resigned to be replaced by Euclid Tsakalotos. Now the ball is in the Greek side of the field. The agenda of these days is full of meeting to discuss about new solutions for the country: many are the proposes from the institutions, like the International Monetary Fund which offers technical assistance to Greek Government but no more funds[1]. The European Central Bank would like to avoid the bonds’ default to stop a domino effect on collateral guarantees used by the Greek’s banks to finance the Eurosystem, so ECB increased the haircut on Greek-risk bonds used in the refinancing operations. The State bonds’ default would bring to a cross-default on the other bonds; in this case, the ECB would have to shut down the ELA, declaring the Greeks bank insolvent. The fact is that, according to the European Stability Mechanism (ESM), the Greek banks only have liquidity problems, but they are solvent.

On the political side, the opinions are different: after Tsipras’ speech on Wednesday 8th at the European Parliament, some exponents from the EPP (European People’s Party) express their disappointment regarding the referendum and Tsipras’ Government policy, in contrast with the ESP (Party of European Socialists) who will not consider any Grexit. Without Greece, there will be no Europe. Donald Tusk, President of the European Council, consider necessary a trust renovation in Europe, instead Juncker, President of the European Commission, starting to be not so optimist about a future of Greece in the monetary union.

Athens has only five days to avoid a Grexit. What will happen if Greece will exit from Eurozone? And what if it will remain in?

Grexit hypothesis

This is the more plausible scenario today. There will be any kind of recovery on short-medium term. Greece economy is not strong enough to sustain a return to dracma: the manufacturing sector is weak, tourism and maritime transport industry has an important role, but the impact on the GDP is very limited, since the foreign profits of the ship owners are not taxed in Greece. The unemployment rate is at the 26% and the salaries have been damaged. The economic recovery will not bring any immediate results. On the political side, SYRIZA will obtain major consensus because the country will be back to the title of the most democratic country in Europe. Tsipras will not betray his political plan and the one of its party[2], but on the social side this will not mean total support because the population might arise and replay the Syntagma Square events of 2012. The International Monetary Fund will stop immediately the negotiation and will consider the option of printing a new value parallel, devaluing drachma of the 50% to Euro. This option might have a strong repercussion on the stock exchange market of the world, already hit by the Chinese crisis, leading to the shatter of the European Union.

The population needs to be assisted so the European Union should prepare an emergency plan for the population like the ones used in case of natural disaster or war.

If we do not want to consider this catastrophic possibility, another could be just a Grexit from the monetary union, transforming Greece in a new actor, like United Kingdom but weaker. Anyway, this possibility seems very difficult to happen, since Greece should have to restore the debt and to pay all the loans, after a strong reconstruction of its economy. Therefore, this possibility will be highly unlikely.

Greece in

But if Greece will present a good reforms plan to save the country and to remain in the European Union, the things will not be so easy anyway: in this case, the measures to be adopted will be a new pension system and a bank reform. In the first case, the pension reform will not lead to a quick amelioration, but it will weight down on the consumptions of the population and on GDP. The big four banks National Bank of Greece, Eurobank, Piraeus and Alpha Bank, should merge, to restore the trust of the stakeholders. The unemployment rate will decrease, remaining high, because it will be hard to employ the high number of people dismissed both from the private and the public sector. New taxes should be introduced to regain money for companies of third sector, on the luxury goods, food, beverages, hotels and transportations. Tsipras should present a new reforms package that will meet the opposition of the radical wing of its own party. In this case, the European Union will be safe but weak, because countries like Slovakia, Cyprus, Spain, Portugal and Italy, can raise doubts about a favoritism and recompense given to Greece that has not respect the Treaties. The Troika will assign extra-funds to Greece and prepare a new saving loan.

It is necessary to mention the concerning of the United States to the Greece situation: during the last week, President Barack Obama declared to be confident that Greece will overcome the crisis. However, why does Obama administration care about Greece’s difficult condition? Russia is considering the possibility to invest in Greek infrastructures and to give commercial loans to the country but at one price: new relations between Greece and Russia. This will bring with it other possible scenarios involving Greece leaving NATO and European Union, splitting the relations of the country from Turkey, creating a new element of instability on the East side of the Mediterranean basin.

The Greek situation can help the European countries open their eyes, because it can bring about a softening of Germany and France position regarding the European financial and economic clauses. A solution to elude another Greece case could be the creation of a common plan to prepare other countries with big economic and financial problems in case of contamination, considering the possibility to introduce a strong subsidy from IMF on a technical plan and the opening to Government loans from third States.


Master’s degree in International Relations (LUMSA)

[1] The expiration date for the payment of the IMF loan is on July 13th.

[2] Two of the objectives of SYRIZA since its establishment are: 1) ask to European Union for a new role of ECB to make it possible the direct financing of the countries of the European Union and their investment programs; 2) asking for a binding referendum for treaties and other relevant European agreements.