Key dates
30 June: in case of failure to repay debts to the IMF, the agencies downgrade Greek government bonds to the level of partial bankruptcy, which after a few days or weeks will lead to a downgrade of banks and all public sector entities. Moody’s at the beginning of planned correction of Greece’s credit rating on 31 July. It can be assumed that there will be a bank run, and the value of Greek bank deposits could fall below 100 billion. Immediately begin capital controls, as was the case in Iceland and Cyprus.
1 July: ECB Governing Council meeting the central bank may require an increase in collateral for the purposes of emergency ELA program .
July 8-17: will confirm that Greece can not repay its debts (450 million to the IMF, the JPY 11.67 billion in loans and EUR 71 million interest on three-year bonds issued in 2014.).
July 20: in case of failure to repay the amount of 3.5 billion to the ECB, the ELA program will be stopped, leading to nationalization generally insolvent banking sector. Another failure to repay will de facto mean a Greek exit from the euro zone. To remain in the Eurozone, the Greek government for a specific period to introduce parallel currency (mainly debentures: government debt of monetary value), but without substantial financial support to Greece ultimately will have no other choice than to introduce a new national currency.
Devaluation … it’s just an illusion
In the event of a Greek exit from the Eurozone, Greece can carry out a devaluation of cash by 50% -70%. In the next year may be unprecedented recession – even at the scale of the country. One year after the bankruptcy of Argentina and the devaluation, recession level reached 11%. In the case of Greece, this level is highly probable.
Contrary to the opinion of supporters Grexitu, devaluation is only an illusion and will not allow the improvement of competitiveness . Devaluation would be effective only if Greece’s balance of payments showed a deficit in structural terms. Three times the volume of imports exceeds exports. In this case, the devaluation is only a symbol of the ailing economy, which could cause a humanitarian crisis on a scale not seen since 1945.
Especially difficult it can be to adopt a new currency to replace the euro. It is not certain whether the Greeks will accept the new currency. Most likely reluctant to use the facility – indicate that all studies on Greece’s membership in the euro zone. The probability of a worst case scenario – a number of currencies in circulation in the long term – is disputed.
This scenario can occur, taking into account that since the end of 2009. From the banking sector flowed around 100 billion that since then the Greeks “keep under the mattress”.
may form a significant black market, just as it did in Argentina or Venezuela. The Greeks would prefer a strong currency – the euro – and gets rid of the new . This would be a perfect illustration of Gresham’s law: bad money wypierałby good. De facto, this would lead to “euroisation” of the economy. Undoubtedly, Greece would lose most from the failure of negotiations with creditors.
The small cost for European countries
Partial or total, a Greek bankruptcy will not affect the deterioration of public finances or to increase taxes in other European countries. In calculating public debt already included the amount of loans granted to Greece, which means that there will be a sudden increase in the debt.
Greek bankruptcy will force European countries to refinance loans on the financial markets. However, given the generally low interest rates and the expected increase in inflation over the next few years, a default of Greek debt should not affect a significant impact on public finances, even in the case of major creditors, such as Germany or France.
Creditors may, however, lose interest of approximately 1.5%. For France, this would mean an increase in tax revenues constituting the equivalent of commonly oprotestowanego superpodatku of the richest 75% (this sum would amount to several hundred million euros per annum).
Limited possibility of “contagion”
The risk of “contagion” at the European level is limited because the private sector exposure to Greece is small. 85% of Greek debt is owned by public entities. European banks no longer have Greek government bonds, or the number of these bonds is limited.
In the case of French banks, their commitment is limited to several hundred million euros worth of Greek corporate bonds. Implemented since 2010. Internal emergency plans about the risks of Greek government bonds, as well as increased prudential indicators have contributed to protecting the European financial sector.
But you can not rule out short-term excessive speculation hedge funds for the most indebted European countries or The most vulnerable banks. In this context, the first fire will follow Italy due to the very high level of public debt and the fragmentation of the public sector. At this point increase in rates in southern European countries in recent weeks it can not be regarded as a sign of “contagion” – is only a signal that the situation is normalizing. Investors already take into account the relevant risk factors after a period of exceptionally low interest rates.
In any case, any contagion would be quickly crushed in the bud thanks to the actions of the ECB. It can not be ruled out that the central bank would increase temporarily buying assets on the secondary market. The limited size of the bond market in Europe allow you to control the market for a certain period of time and attacks the hedge fund would be quickly stopped.
Greek clock is still ticking
On the other hand, the political impact assessment Greece’s exit from the euro zone is difficult. Polarization of public opinion in Germany, Denmark, Spain and Finland, as well as the prospect of starting the UK from the EU, reflect the fact that for a long time Europe has not implemented any joint project.
exit of Greece from the euro zone may represent a point of inflammation and Europeans realize that no longer combine their common interests, fate nor the will to live in the community. The real problem with Greece is certainly political rather than economic. Greek Prime Minister Alexis Tsipras clearly is aware and wants to raise the issue of Greek debt at the political level on the occasion of the next European Council on 25-26 June. In other words, do not involve too great expectations from the summit of the Eurogroup on June 18.
Christopher Dembik, Saxo Bank
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