Asian Business Issues - Rants & Raves, Illusions & Collusions etc.
Tuesday, January 06, 2015
Greece Is The Word ...
Why the renewed talk of a Grexit from the eurozone?
Greek Prime Minister Antonis Samaras has called a snap election for January 25. Unfortunately for Mr Samaras, the narrow front-runner for the election is his opponent Alexis Tsipras, head of the leftist Syriza party. Mr Tsipras wants Greece to remain in the Eurozone, but he also wants parts of Greece's debt written off and austerity measures reduced. It's not certain whether the rest of the Eurozone - and in particular, Germany - will accept this. Greece could be forced to leave the Eurozone.
What would happen to Greece if it left the eurozone?
The scenarios range from mildly painful to catastrophic. At the very least, leaving the euro and writing off large amounts of debt would make Greece a pariah in international capital markets - who wants to lend money to a country that doesn't repay? Greece would be forced to reintroduce its old national currency, the drachma, and it would be a difficult transition from the euro. But Greece would again have its own currency and central bank and be able to directly steer its economy.
Still, the resulting turmoil could make Greece's economic position even worse than it currently is. The doomsday scenario is political unrest that could lead to civil war and a military coup.
What would happen to the European and world economies if Greece left the eurozone?
Europe's economic position is far better now than the crisis years of 2009 and 2010. German leader Angela Merkel has stated that she would be willing to accept a Grexit because the feeling is that the Eurozone would be able to hold together if Greece left. This would still be enormously expensive - costing billions of Euros - and financial markets worldwide would take a hit. American academic Barry Eichengreen said the impact of Greece leaving the euro would be "Lehman Brothers squared".
Previously, it was believed that if Greece wrote off their debt and left the euro, other troubled European economies - Portugal, Ireland, Spain, Italy - could follow. There is still a small chance this could happen. The implosion of the Eurozone would have dire consequences for the Europe and the world.
So how bad is Greece's economy?
Since 2008, the year the global financial crisis began, the economy has shrunk an astounding 25 per cent. If the Greek economy grew at 2 per cent a year, it would still take 13 years to get back to its 2008 size.
Greece's debt as a proportion of GDP was 105.4 per cent in 2008. It soared to 171.3 per cent in 2012, shrunk to 156.9 per cent in 2013, but reached 174.9 per cent last year - higher than ever. Only Japan has worse debt. Greek unemployment is at 25 per cent. And because Greece has neither its own currency or central bank, it can't devalue the exchange rate or introduce monetary stimulus to improve its economy.
In short - the Greek economy is in terrible shape.
What do bond markets think about a Grexit?
Southern European bond yields have risen in recent days but are still very low, reflecting the belief that the fallout from a Grexit can be "ringfenced". Spain's 10-year yield touched a record-low 1.49 per cent on January 2 and is now at 1.60 percent. Italy's 10-year rate reached a record low 1.73 per cent on January 2 and is now at 1.83 per cent.
By contrast, the Greek 10-year yield has increased 41 basis points to 9.65 per cent. Despite the rise over the past weeks, it's still well below record high yields of more than 30 per cent hit in 2012.