In my last post I provided an overview of the Greek elections;
now it’s time to look at the Greece faces.
Aside from the previously referenced NYT articles, I used this
Spiegel article. My key takeaways are as
follows:
- The parties that initially negotiated the bailout terms are willing to renegotiate some of the bailout terms, but that won’t be enough for Syriza, which is needed for the coalition to have legitimacy.
- As a result new elections will most likely be called with anti-bailout parties primed to pick up more votes. The new election will basically be a referendum on whether Greece will remain in the Euro.
- Presuming the EU will not finance Greece without the bailout terms, if Greece officially refuses the provisions of the bailout package they will default and leave the Euro, unless the EU relents.
- At this point Greece leaving seems likely. Intrade probability has it around 60% by then end of 2013 for one country to leave the Euro. That one country would be Greece.
- Assuming that happens, Greece will return to the Drachma. This will be significantly devalued relative to the Euro, in turn making imports expensive and exports cheaper; thus, making Greece more competitive. Currency devaluation could be between 50% and 80%.
- It also becomes cheaper to invest in Greece, which would attract FDI (foreign direct investment).
- Private companies with debts denominated in Euros would no longer be able to pay those debts and bankruptcy would then follow.
- Given all that, the IMF estimates a decline in Greece GDP by more than 10% is possible in the first year, but then after that the recovery should be quicker given the devaluation.
- Such a plan has worked before; however, there is still a risk of a government collapse. Further, savers essentially have their savings inflated away.
- Note: Greece is currently in year 5 of their recession. Unemployment is 22% with youth unemployment at 53%. In the 3 years unemployment rose by nearly 100%.
In my final piece on this subject, I will take a prospective look at the fallout in the EU.
