Grexit Scenario

The Bad Ending: More Debt, Unemployment

Greece Dark19843833_2
Hoping for the best despite fears of unrest, recession and default.
  • Why it matters

    Why it matters

    Greece will see its economic slump worsen in the case of a Grexit and creditors are likely not to get all their loans repaid.

  • Facts


    • Greece failed to renew is bailout program with its lenders over the weekend.
    • Greece owes €321 billion ($356 billion) to its creditors.
    • Greece’s umemployment level is around 25 percent.
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Sunday may have been the beginning of the Grexit.

When Greece’s government over the weekend declared capital restrictions and ordered banks to remain closed the next six working days, it effectively shut off the country from the other 18 euro-zone countries.

“The risk of a Grexit has significantly increased. Nobody knows what will happen. There is no precedent,” Nicholas Spiro of London-based consultancy Spiro Sovereign Strategy told Handelsblatt Global Edition.

“Banks will hardly be able to issue euros and Greece will be forced to issue promissory notes or IOUs.”

Holger Schmieding, Chief economist, Berenberg bank

Mohamed El-Erian, the chief economic adviser at German financial services firm Allianz, believes there is only a 15 percent chance that Greece will stay in the euro zone.

“What we are seeing here is what economists call the sudden stop, when the payment system stops. The logic of a sudden stop is a massive economic contraction, social unrest and it’s going to make continued membership of the euro zone very difficult for Greece,” Mr. El-Erian told Bloomberg.

Greece could be forced to leave the currency zone within weeks, he said.

Holger Schmieding, chief economist at Berenberg Bank in London, said capital controls could result in a worsening of Greece’s current recession.

“If the current situation persists, longer than a week, unemployment will rise, companies will go bust and tax proceeds will fall further. It is a vicious circle,” Mr. Schmieding told Handelsblatt Global Edition.

Consumers would virtually stop spending in face of uncertainty, pulling down the economy, he said.


greece banks_dpa
People walk past closed branches of banks near fresh graffiti reading ‘People say NO’ in Athens on Monday. Greece is imposing capital controls and ordering the closure of banks. Source: DPA


“Banks will hardly be able to issue euros and Greece will be forced to issue promissory notes or IOUs. Pensions, wages and social benefits will probably be paid out one more time in euros but as of July that won’t be possible any more, at least not in full,” Mr. Schmieding said.

The government IOUs could at some point, at the earliest after several months, become a replacement currency to the euro, he said.

“From a legal point of view, one cannot leave the euro, although a solution will be found eventually. The exact details have to be discussed with Europe on how to exit the euro but remain in the European Union,” Mr. Schmieding said.

Only the Greek government would have to power to decide to introduce a new currency in the country, he said.

Defaulting on repayments – the first one of €1.6 billion is due to the IMF on Tuesday – might not lead to an immediate Grexit. (Click here to read how Greece might remain in the euro)

“Most people assume that if Greece defaults that Greece would introduce a new currency, but there is nothing in the treaties which would allow the euro zone to kick Greece out,” said Sebastian Dullien, a senior policy fellow at think tank European Council on Foreign Relations in Berlin.


Video: The Greek finance minister, Yanis Varoufakis, explains how the meeting with his euro-zone counterparts went.


“It’s unchartered territory but it doesn’t necessarily mean that Greece is out,” Mr. Dullien, who is also an economics professor at HTW Berlin, the University of Applied Sciences, told Handelsblatt Global Edition.

A Grexit and a new currency, however, would offer the possibility to devalue the currency, which could Greece’s economy competitive and help restore its economy.

A scenario where Greece performs better after leaving the euro zone, might also be a risk for the euro zone, Mr. Dullien said.

“If the Greeks do this halfway well, they could do better than under a new austerity program. That being said, for the euro zone it might be problematic because you demonstrate that being in the euro is not irrevocable, that you can leave or be kicked out. And that might cause at some point new capital flows,” Mr. Dullien said.

Anti-austerity movements in other euro zone countries, for instance Podemos in Spain or Peppe Grillo in Italy, could find inspiration in a successful Grexit.

“There is a lot of money in Italy and Spain because they have so many government bonds, this might destabilize the whole euro zone,” Mr. Dullien said.

Another negative factor for euro zone countries which have lent dozens of billions of euro to Greece would be the country’s difficulty in repaying these debts in the case of a Grexit.


Gilbert Kreijger is an editor at Handelsblatt Global Edition in Berlin, focusing on companies and markets. Siobhán Dowling and Meera Selva contributed to this article. To contact the author:

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