I have just done the Market Wrap for Talking trading and part of the conversation was regarding Greece. The thing I find intriguing about the markets reaction to the prospect of Greece being booted out of the EU and defaulting on its loan obligations is that everyone is surprised that it is happening. Defaulting on debt is the natural state of existence for Greece. You would not be surprised that deserts are dry so why be surprised that Greece once again has displayed an inability to run an economy – hell I doubt they could run a hot bath.
As a bit of history Greece defaulted on its obligations in 1826, 1843, 1860, 1894 and 1932. The first recorded Greek default was in 4BC – so they have had a bit of practice at this.
There are no doubt contingency plans for this among other EU members and what is spooking the market is the uncertainty as to what those plans are. Once they are known my guess ( and it is only a guess) is that some of the panic around this event will wash out of the system. Not being an economist (something I am proud of) I had to do a bit of digging as to what the consequences for the Greeks might be and I came across the following list –
- Rapid devaluation of the drachma against other currencies (the rate might surpass 1,000 ΔΡΧ/1€). An attempt to tie the drachma to the euro and lock the conversion rate is doomed to fail (as it failed in the case of Argentina), because of the huge capital flight and depletion of foreign exchange reserves.
- The devaluation will lead to skyrocketing inflation at levels equal and greater than 40 percent, further limiting thereby the purchasing power of citizens.
- Capital flight and a sharp increase in non-performing loans will be the coup de grace for the weak country’s financial system, which would collapse, “drying” the real economy.
- In such an eventuality the wage and pension freeze payment will be inevitable for a while until the partial restoration of liquidity. The consequences from social unrest that will likely follow are unpredictable.
- Gross domestic product will likely shrink to about 2/3 of the current level.
- The public debt of Greece, totaling 322 billion euros, will increase automatically depending on the amount of the depreciation of the drachma, multiplying our borrowings.
- Even if, after bankruptcy, a partial debt restructuring follows, it will not be painless. It will be accompanied by a new rescue package (only from the IMF now) and very burdensome fiscal adjustment measures.
- There will be an equal increase of private debt through the skyrocketing of lending and depositing rates in an effort to control inflation. Higher interest rates will also make it difficult for businesses to raise capital.
- Suffocation of import business due to a weakened market, the devaluation of the drachma and the obvious lack of credit.
- Failure of imports will bring shortage of essential items on the market since, as we know, Greece is not self-sufficient in raw materials and meets its needs (eg. wheat, milk, meat) by imports from foreign countries.
- Invasion of predatory foreign investors, who will acquire companies, property, and public property at derisory prices. It will lead to a sellout of the country, now claimed by the proponents of the drachma.
- Diplomatic and economic isolation of Greece, who, being in a very difficult situation, will not be able to follow geopolitical developments in the region, as well as any challenges by its neighbors.
Source – HuffPost Greece
Point 12 is interesting since Greece was effectively shut out of international capital markets for decades following the default of 1832 and were only reopened to them after their commitments were settled in 1878. However, true to form they defaulted again 1893. As Marx said – history repeats itself, first as tragedy, second as farce.