What happens if Greece leaves the euro?

cavedave

Jürgen Koppelin, a budget expert in the liberal Free Democratic party, which is part of Germany’s coalition government. It cannot be ruled out, he said on Tuesday, that “Greece would have to leave the eurozone for a time… The Greek currency could be depreciated. That could even help them with exports.”

from the financial times here

Or as Krugman says here

Might it also leave the euro? That would be a total mess, inviting the mother of all bank runs, although as I’ll explain in a moment that may be happening anyway

What probability would you give on Greece leaving the euro?

If Greece does leave the euro how would it effect a greek person? What would happen to their wages, their mortgage, their savings and such.

If a country did leave would that increase the chances of another country following suit?

Économiste Monétaire

The ECB has a legal paper looking at withdrawal from the Euro/EU:
http://www.ecb.int/pub/pdf/scplps/ecblwp10.pdf

“Greece would have to leave the eurozone for a time… The Greek currency could be depreciated. That could even help them with exports.”

Greece doesn't have a currency, so there's nothing to depreciate. There is no Greek Euro, just like there is no Irish Euro. There is the Euro. Why they were allowed to join the Euro, I don't know. If their debt is denominated in Euro, and if they withdraw from EMU, they still owe that debt in Euro. Setting up a new currency (for example) at 1:1 then depreciating to 1:2 (1 Euro gets 2 Drachmas), you then double your debt repayment obligations. For the average Greek person, import prices would rocket.

cavedave

If their debt is denominated in Euro, and if they withdraw from EMU, they still owe that debt in Euro

So they would have to default and then withdraw?

And what about an individuals bank deposits and borrowing? If it is the case that your debts are always in euro but your savings can get suddenly switched to drachma that would make Greek's very nervous. If that was the situation I would guess a politician even mentioning the possibility of leaving the euro would be verboten.

From Time

"A default of some sort — or debt restructuring — is highly likely and people holding government bonds will have to agree to a haircut," says Philip Whyte, senior research fellow at the London-based Center for European Reform think tank. "But given the alternative, that would not be the worst possible outcome, which would be for Greece to leave the euro zone. And for Greece's problems to spread to other vulnerable countries, like Spain and Portugal."

Économiste Monétaire

Well, withdrawing from the Euro would make default far more likely, in my opinion; which they would do first, I don't know. Bank deposits would be converted to the new currency, just like your Punt-denominated deposits were converted to the Euro. That's why Krugman is saying there would be a massive outflow of deposits. I'm not sure about domestic loans like mortgages, but I assume they would be converted too. It's a bit different in the case of a sovereign borrowing as the bond indenture would specify the currency that coupon & principal payments would be made in.

andrew

The whole down grading thing seems like a self fulfilling prophecy; you get downgraded to junk, the interest rate your on borrowing rockets, so you can't repay your debts, and so your debt becomes junk. How do ratings agencies come to their ratings?

cavedave

A similar positive feedback cycle happens with fear of a devaluation.

What would happen if your money was in a foreign owned but locally operating bank? If you had your cash in Rabobank and they are backed up by the Dutch central bank. Does that mean your deposits with them would stay as euro or would they also get changed to Drachmas?

Fiskar

Have to ask where were all the Regulators in the ECB to allow Greece rack up that sort of debt? How can you trust Regulation if they miss Greece, who else have they missed (Latvia, Lituthania?) besides Portugal, Italy and Spain?

Perhaps it is best to set an example to these countries and let Greece ride it out from outside the Euro zone? What does it offer as an ecomony that says it is worth saving?

Anita Blow

Fiskar wrote: »

Have to ask where were all the Regulators in the ECB to allow Greece rack up that sort of debt? How can you trust Regulation if they miss Greece, who else have they missed (Latvia, Lituthania?) besides Portugal, Italy and Spain?

Perhaps it is best to set an example to these countries and let Greece ride it out from outside the Euro zone? What does it offer as an ecomony that says it is worth saving?

Greece forged their accounts AFAIK

Fiskar

Anita Blow wrote: »

Greece forged their accounts AFAIK

Correct, in other words creative accounting. Should this

1) Carry penalties?

2) Warrant expulsion from the EU?

3) not have been picked up by Regulators, and if not why not and how can you have effective regulation where these rules can be broken??

?

Économiste Monétaire

The ECB doesn't regulate sovereign states. The relevant bodies would be ECOFIN and the European Commission, which enforce the Stability and Growth Pact. The independence of national statistical bodies needs to be looked at and treated in the same manner as that of national central banks, in my opinion. I wouldn't be against the idea of lobbing Greece out of the Euro, but possible contagion for other weak Euro members, e.g. Ireland, somewhat diminishes the appeal of this approach for me.

Anita Blow

How realistic though is it for a country to be expelled from the Euro?
Would the time and cost of re-introducing the old currency not make it such an effort?

Anonymous1987

“It’s not a question of the danger of contagion; contagion has already happened,” Angel Gurría told Bloomberg. “This is like Ebola. When you realise you have it you have to cut your leg off in order to survive.”

With comments like the above from the OECD it looks like things are heating up fast. As for ECOFIN it seems the best they can manage is a stern look of disapproval from across the table.

silverharp

Since the start of the Euro, gold has had something like a 95% correlation with the Euro in directional terms, recently they have decoupled, it seems like the barbarous relic is calling the establishment's bluff
I'll be getting the popcorn out to see how the PIIGS 1-1.5 trillion Euro worth of debt will be financed or maintained in any sustainable way. Real interest rates will be heading north of 8% which will bleed their economies dry.

cavedave

From the guardian

Angela Merkel, Germany's chancellor, promised swift action to end the crisis, but said it was a mistake for Greece to have been allowed to join the single currency. "In 2000 we had a situation when we were confronted with the question of whether Greece should be able to join the eurozone," she said. "It turned out that the decision [in favour] may not have been scrutinised closely enough."

At the end of a day that saw interest rates on two-year Greek bonds rise to 38% at one point, Spain joined Greece and Portugal tonight in seeing its credit rating downgraded

silverharp

cavedave wrote: »

From the guardian

she is playing politics as she has regional elections coming up, the recent Bild headline "Die Griechen wollen unser Geld!" summed it up nicely

cavedave

No doubt she is. How long can the Greeks play a game with a 38% interest rate though?

Heres another article by krugman on the weird inevitability these things can have once they pass a certain point.

Michael Mouse

The fact is that whatever the Greek government is saying the Greek people cannot accept how bad things are.

They are in a complete denial of what they need to sacrifice to get themselves out of their mess. They want to make "The Past" responsible for their current position! Unfortunately "The Past" does not pay tax or accept a wage cut.

When (not if) the Irish Public Service rejects the Croke Park Agreement, we will be hearing the same ... "don't blame the Public Service for the mess we are in, it's due to "The Past" mistakes of the banks / the Goverment. They should be made to pay!"

As if!

Mickey Mouse Economics!

tara73

@ economiste monetaire

thanks for the link about the 'paper of expulsion from the eu and emu'

it's very interesting as it shows that experts are considering and analyzing the case of an expulsion from eu members whereas until recently even the thought of expelling an eu-member seemed absurd and impossible.

interesting as well as this paper is only 4 month old, so written with the current crisis in mind.
again a sign how fast the politcians or experts can change their laws if they just want to..

@silverharp
yes, she is. just read they'll make a decision on the 10th of may. the important regional elections are on the 9th of may....embarrassing...

blucey

Anita Blow wrote: »

How realistic though is it for a country to be expelled from the Euro?
Would the time and cost of re-introducing the old currency not make it such an effort?

There is no mechanisim for this Anita. None. So how could Greece be "expelled"?
I do wish people would check the basics out. No-Mechanisim.

blucey

tara73 wrote: »

@ economiste monetaire

thanks for the link about the 'paper of expulsion from the eu and emu'

it's very interesting as it shows that experts are considering and analyzing the case of an expulsion from eu members whereas until recently even the thought of expelling an eu-member seemed absurd and impossible.

interesting as well as this paper is only 4 month old, so written with the current crisis in mind.
again a sign how fast the politcians or experts can change their laws if they just want to..

@silverharp
yes, she is. just read they'll make a decision on the 10th of may. the important regional elections are on the 9th of may....embarrassing...

Barry Eichengreen has papers on this going back to 07, with working paper versions back earlier. So, not really....

andrew

blucey wrote: »

There is no mechanisim for this Anita. None. So how could Greece be "expelled"?
I do wish people would check the basics out. No-Mechanisim.

Would it be impossible to 'invent' a mechanism, or is it flat out impossible without another treaty?

tara73

blucey wrote: »

There is no mechanisim for this Anita. None. So how could Greece be "expelled"?
I do wish people would check the basics out. No-Mechanisim.

blucey, if you're talking about checking out the basics, did you read the paper from the link which 'economic monetaire' posted?

It's written most recently and it describes the possibilities which ly within the actual treaty as it is now and in the end it discusses the possibility of introducing a new treaty which includes an exit clause / a right of collective expulsion of members from the EU.

At the moment, there's no direct way of expelling (although there are already clauses which allow councils to temporarily suspend rights of members which can be seen as an indirect way of expulsion)
But treaties and laws are made by human beings so I don't see why it should be impossible that they can't be changed.
And I think it is part of the initial question of this thread as well.

If you are so sure about there's no mechanism to change treaties, can you give a solid proof??

blucey

tara73 wrote: »

blucey, if you're talking about checking out the basics, did you read the paper from the link which 'economic monetaire' posted?

It's written most recently and it describes the possibilities which ly within the actual treaty as it is now and in the end it discusses the possibility of introducing a new treaty which includes an exit clause / a right of collective expulsion of members from the EU.

At the moment, there's no direct way of expelling (although there are already clauses which allow councils to temporarily suspend rights of members which can be seen as an indirect way of expulsion)
But treaties and laws are made by human beings so I don't see why it should be impossible that they can't be changed.
And I think it is part of the initial question of this thread as well.

If you are so sure about there's no mechanism to change treaties, can you give a solid proof??

yes, i did. When it came out.
Good luck with getting a new treaty drafted, approved, up and running in the next few days.

tara73

blucey wrote: »

yes, i did. When it came out.
Good luck with getting a new treaty drafted, approved, up and running in the next few days.

alright, you are skipping questions now, we discussed the possibility and now you're talking about the time of approval, that's another step.

ok, no need to argue any further for me. thanks.

cavedave

Does only public debt matter in these sorts of situations (around government defaulting)? As in if there is a huge private debt presumably the public are less able to also carry the public debt?

I ask in relation to this list of the public and private debt of european countries. where our private debt is greater than greeces public and private combined as a % of gdp.

Hasschu

It is not necessary to engage in anything as dramatic as a de jure expulsion. Simply by doing nothing (inaction) the ECB and the European Commission can expel (de facto )Greece from the EMU and the EU. Greece will then reinstitute the Dracma and attempt to mend fences with the EMU and the EU. Think of it as being in limbo except it will be the Byzantine version. Greece will not be able to roll over its debt in May 2010 and after. The creditors which include the vast majority of European banks will then start to run the overdue debt clock 90 days, 180 day, 365 days, nonperforming. Certainly some banks will go into receivership, economic growth will be crippled in Europe exacerbating the problems faced by the weaker economies. We know where we stand and it is not on solid ground. Every reasonable effort will have to be made by every member of the Eurozone to rescue Greece, Portugal, Spain and Ireland. It will probably boil down to a five year interest rate freeze and a 25% haircut on principal in return for ECB/Commission support. A few pounds of flesh has be extracted from the creditors (banks) in order to mollify the electorate in Germany and other countries with responsible gov't. Our gov't is about to meet its Waterloo let us hope the replacement is capable of governing in tough times.

tara73

it's a theory, but I don't think it's realistic and will happen like that.

the "responsible" country as germany just announced that probably german companies and deutsche bank will take part in the rescue plan.
but it's not official and they don't say numbers, it's just to give confidence back to the speculative markets and gain time until the elections.

I think nobody, not a single person on earth can precisely predict at the moment what will happen, what is the best and what will be the outcome with greece and all the other struggling eu countries. it's a complete new situation and every decision is on shaky ground.

noodler

Should we send them a TEXT asking to default now rather when they have our money?

ranger4

With yesterdays bailout agreement Markets are falling in europe and euro continues to fall, Unless we get Dramatic turnaround and soon then Portugal-spain looks next contries to be targeted with ireland to follow.

Fiskar

ranger4 wrote: »

With yesterdays bailout agreement Markets are falling in europe and euro continues to fall, Unless we get Dramatic turnaround and soon then Portugal-spain looks next contries to be targeted with ireland to follow.

Is Italy not more in the line of fire than Ireland?

Slippers 2

I don't know but there's a few different ways to look at the figures.



trueeconomics.blogspot.com/2010/05/economics-03052010-world-debt-wish-5.html

noodler

By all accounts our National Debt is pefectly servicable and well within our means.

Slippers 2

Not all accounts...
Richard Douthwaite, February 2010: http://www.feasta.org/forum/download/file.php?id=132 (pdf, save then open)

Extracts:

My view is that this country's economic life will carry on breaking down month by month. Domestic demand will continue to shrivel as a result of wage reductions, higher taxes and the public's reluctance to spend because of the high level of uncertainty and the cancellation of state and private projects. With their markets slipping away, more companies will collapse under the weight of their debts. Figures released by ICC Information in February show that 21% of trading companies already have a ‘Negative Net Worth’. In other words, their balance sheet liabilities exceed the value of their assets. Their collapse will throw thousands out of work and many more mortgage holders into arrears. The banks will suffer huge losses as their bad debts mount and will need billions more in state support.

Those still in work will save all they can to build themselves a safety cushion. This will starve the economy of its monetary life-blood as the banks which take in their savings will be unable or unwilling to lend the money on.

With a much-reduced tax-take, the government will be unable to reduce its borrowing despite its recruitment embargoes and harsh spending cuts. Its higher social welfare bills and the cost of recapitalising the banks and meeting NAMA's needs will see to that. Potential lenders will see what's going on and demand an increased rate of interest on their money. This will make the state's position worse and require it to borrow more.

So I expect several miserable months of increasing difficulty to pass until, all of a sudden, something happens which means that the National Treasury Management Agency is unable to sell new bonds to raise the money it needs to repay ones that are about to mature and Ireland will default.

So the nightmare would go on. In the absence of the collective debt-writedown and inflation that a devaluation provides, the only way that the private debt burden can be lifted is by individuals and companies going bankrupt and having most of their debts written off. Their assets would be sold at very low prices since no-one would be willing to pay much in the throes of an economic collapse. After a decade or more of misery, the individually-negotiated writedowns would return the total debt-to-national-income ratio to a supportable level at which asset values might be a tenth of their level today.

The country would be wrecked by this process. Education and health care would suffer savage cuts. If it survived, the social welfare system would be a shadow of its current self and the brightest and best of the population would leave for pastures new. Many buildings would be abandoned and others would fall into disrepair since no one would be able to afford to maintain them. Some rail lines would close and many local roads would be barely usable.

andrew

Slippers 2 wrote: »

Not all accounts...
Richard Douthwaite, February 2010: http://www.feasta.org/forum/download/file.php?id=132 (pdf, save then open)

Extracts:

Sounds like wild extrapolation to me. People who say 'WE'RE ALL DOOMED' I think usually tend to be just as wrong as people who say that everything will be brilliant. The truth ends up somewhere in the middle.

Hasschu

We are far from doomed. We were the people who originated the saying "To hell with poverty we will kill a duck." We are now number three on the list after Portugal and Spain. With a little bit of luck Italy will be gracious enough to let us go before them. Italy is the elephant in the boardroom and is big enough to put fear into the hearts of the most stalwart Frankfurt and Basel bankers. Today we are in relatively good trim it is our deficit and decline in GDP that is the main cause for concern. This year we will add at least 12-14% points to the national debt bringing it up to 77-79% of annual GDP. The year after the problem compounds as the economy weakens and the debt grows. So far perception outside Ireland is that we have the intestinal fortitude to handle bad times with a degree of equanimity that is usually not found on the shores of the Mediterranean. Do we have the social cohesion to handle this successfully ? What would the brilliant Irish political economist Mountifort Longfield say if he was around today, the thrift paradox comes to mind. I dredged this up at Duke Univ. "brilliant Irish political economist" perked my interest immediately, just what we need now.

Économiste Monétaire

Yesterday, the ECB "suspended" the requirement of an investment grade rating for Greek sovereign debt in refinancing operations. After S&P downgraded Greece to BB+, all they needed was either Moody's or Fitch to follow in kind and banks could no longer use Greek debt in repos.

http://www.ecb.int/press/pr/date/2010/html/pr100503.en.html

This may have something to do with the big longer-term repos conducted last year; if Greek debt fell below investment grade, then any banks which used the debt as collateral would need to pony up something else or borrow large sums to pay back the ECB.

cavedave

There is an interesting graph here of Europe's Web of Debt. greece does not owe that much money in comparison to Ireland. Italy owes France 20% of the French gdp.

Flamed Diving

A US web would be something.

Slippers 2

From state to state or between the US and the rest of the world?

Flamed Diving

ROW

cavedave

Krugman again

I see three ways Greece could stay on the euro.

First, Greek workers could redeem themselves through suffering, accepting large wage cuts that make Greece competitive enough to add jobs again. Second, the European Central Bank could engage in much more expansionary policy, among other things buying lots of government debt, and accepting — indeed welcoming — the resulting inflation; this would make adjustment in Greece and other troubled euro-zone nations much easier. Or third, Berlin could become to Athens what Washington is to Sacramento — that is, fiscally stronger European governments could offer their weaker neighbors enough aid to make the crisis bearable.

Some intersting graphs that make Ireland look bad here

Flamed Diving

And a more granular and up to date look at Ireland:

Économiste Monétaire

Employment rates are also interesting:



Spain had a property bubble similar to Ireland, as far as I'm aware.

noodler

I am not up to speed with Spain situation but they have a really high unemployment rate obviously.

They also have a (relatively) low national debt. So does mean they haven't dealt with their property bubble? Where do they stand on holes in the banks' balance sheets?

cavedave

E.U. Details $957 Billion Rescue Package

European leaders agreed on Monday to provide a huge rescue package of nearly $1 trillion in a sweeping effort to combat the debt crisis that has engulfed Europe and threatened markets around the world.

So what happens now?

noodler

noodler wrote: »

I am not up to speed with Spain situation but they have a really high unemployment rate obviously.

They also have a (relatively) low national debt. So does mean they haven't dealt with their property bubble? Where do they stand on holes in the banks' balance sheets?

Ah but a lot of the spanish property bubble was sold to immigrants/foreigners/tourists..a lot of that debt probably lies with foreign banks,..

Flamed Diving

cavedave wrote: »

E.U. Details $957 Billion Rescue Package


So what happens now?

EU Bailout Package Boosts European Stocks

http://online.wsj.com/article/SB10001424052748703880304575235462819341480.html?mod=rss_whats_news_us

getz

cavedave wrote: »

E.U. Details $957 Billion Rescue Package


So what happens now?

dont know, but what i do know is that the UK has just contributed £9,billion

Capt'n Midnight

Économiste Monétaire wrote: »

Why they were allowed to join the Euro, I don't know. If their debt is denominated in Euro, and if they withdraw from EMU, they still owe that debt in Euro. Setting up a new currency (for example) at 1:1 then depreciating to 1:2 (1 Euro gets 2 Drachmas), you then double your debt repayment obligations. For the average Greek person, import prices would rocket.

They were allowed to join because like a lot of others they were able to fiddle the books to meet the criteria.

As for devaluing the currency , look what happened to the UK at the end of WWII they got a lot of money off the US and one of the conditions was to loose the gold standard. That loan took about 60 years to pay back.

Économiste Monétaire

Capt'n Midnight wrote: »

They were allowed to join because like a lot of others they were able to fiddle the books to meet the criteria.

As for devaluing the currency , look what happened to the UK at the end of WWII they got a lot of money off the US and one of the conditions was to loose the gold standard. That loan took about 60 years to pay back.

It was a rhetorical question. Not sure what WWII loans at 2% have to do with Greece.

t4k30

Who cares about Greece. What we need is The UK or at least England to join the Euro !!