Greece Eyes Outcomes From Euro to Parallel Currency: Scenarios

Πηγή: San Francisco Chronicle
By Jennifer Ryan (Bloomberg)
June 6 2012

Below are some frequently asked- questions on the future of Greece as it prepares for second elections on June 17 and confronts the possibility of exiting the euro.

*T How have markets reacted since the May 6 election: Greece's benchmark stock index has fallen about 27 percent since the election, compared with a 7 percent decline by the Stoxx Europe 600 Index. Speculation that a country will leave the euro-area have increased. Odds on a euro breakup by the end of this year rose to 39.4 percent as of June 1 from 22 percent on May 4, data compiled by Dublin-based Intrade show. The odds of that happening by the end of 2013 have risen to 57.6 percent. 

 What will happen immediately after the results are known? The Greek constitution says that when a coalition can't be formed, the president must broker a government of national unity, and if that can't be done, new elections must be held. This is what happened after the May 6 election and the same pattern could repeat itself if there isn't a clear result on June 17. 

What are the possible outcomes of the vote? Credit Suisse AG says these are the three main outcomes: 

-- A pro-euro coalition (40 percent probability). This could result in a successful renegotiation of parts of the EU/IMF program and a continuation of funding. -- An anti-bailout coalition (40 percent probability): This could lead to a euro exit, depending on how confrontational the government wishes to be in its negotiations. An approach that involves cancelling the bailout terms could lead to a departure from the currency. 

-- A stalemate (20 percent probability): Under pressure from international partners, this could result in a unity government and an attempt to renegotiate the bailout. Even if a renegotiation was successful, implementation of reforms would be difficult. 

 What do the Greek people want? A poll on May 31 showed a vote would produce roughly the same pattern as in the first election: New Democracy had 23.9 percent support, while Syriza had 22.5 percent and Socialist Pasok had 12.6 percent, according to a survey conducted May 29-30 and published on the website of Athens-based Real News. The margin of error was 2.6 percentage points. The poll showed that 49.6 percent of respondents said they disagreed with Greece keeping the euro if all the austerity measures linked to bailouts had to be implemented, compared with 42.2 percent who said Greece should keep the euro "at all costs." 

 What happens after a government is formed? Goldman Sachs Group Inc. sees three possibilities:

-- Muddling through (most likely): Greece seeks to stay in the euro but doesn't agree to unconditionally implement the reform program. The most likely consequence is that the Troika ceases payments, though banks continue to receive European Central Bank support unless a political decision is made to withdraw central bank facilities. Greek membership in the euro depends on its ability to adjust to new incentives as the threat of exclusion from the rest of the bloc gains credibility. 

-- Slow exit (next-most likely): Greece is excluded from the euro area after the remaining members are given time to build firewalls against the shock, such as deposit guarantees and liquidity injections by the ECB. While there isn't a legal mechanism for exclusion, it could be done in practice by cutting Greek banks off from ECB facilities and payments systems. For the rest of the euro area, the firewalls are unlikely to be robust enough to deal with the impact of the Greek exit, while there may be fallout on markets because of the precedent that euro membership can be rescinded, Goldman says. 

-- Fast exit (least likely): Greece abandons the euro and introduces a new currency. A "sudden and abrupt" exit wouldn't give other nations time to prepare and an insufficient firewall could mean an unravelling of the euro area. 

 How much time would Greece have to arrange its affairs were it to choose a fast exit? Assuming Greece were to make the decision at the end of foreign currency trading in New York on a Friday, it might have about 46 hours to get its affairs in order before the opening of trading in Wellington, New Zealand on the Monday. In that time, officials might have to manage a potential sovereign default, plan a new currency, formulate a plan to recapitalize banks, stem the outflow of capital and seek a way to pay bills once the bailout lifeline is cut, economists say. 

 What might a new Greek currency be worth? 

Nomura International says its initial estimates suggest that a new drachma would plunge between 50 percent and 60 percent. National Bank of Greece SA, the country's biggest bank, says the new currency could plunge about 65 percent, wiping at least 55 percent from per capita income in euro terms. The recession would deepen by about 22 percent at stable prices, adding to the 14 percent recorded in the 2009 to 2011 period, it said. Unemployment would jump to 34 percent and inflation rise to above 30 percent, pushed up by the higher cost of imported goods, National Bank of Greece says. 

 Could this turn out as bad as what followed the 2008 collapse of Lehman Brothers Holdings Inc.? 

Much will depend on the ability of the euro-area's policy makers to quarantine Greece by increasing the size of its rescue funds, reinforcing banks and ensuring liquidity. If they don't do enough then "all hell breaks loose," says Barry Eichengreen, a professor at the University of California, Berkeley, and author of a 2006 history of the European economy. Bank of America Merrill Lynch strategists estimate the euro-region's gross domestic product would contract at least 4 percent in the recession that follows a Greek exit, similar to the decline after Lehman's bankruptcy. 

 What might officials do to prevent the euro region unraveling? 

Morgan Stanley says there is a 35 percent chance of a euro- region breakup by the end of next year and lists five possible policy responses to limit the fallout. In the near term: 

-- Aggressive ECB policy action. Potential measures include more long-term refinancing operations with longer maturities; relaxing the collateral guidelines on national central banks running Emergency Liquidity Assistance; large-scale purchases of private and government bonds. 

-- Recapitalization of banks via the European Financial Stability Facility or European Stability Mechanism. In the longer term: 

-- The creation of a federal deposit guarantee scheme. 

-- Fiscal union. 

-- The ECB becomes official lender of last resort for a federal Europe. Are there alternatives to a full Greek exit? Deutsche Bank AG's Thomas Mayer said in a May 18 note that the Troika could stop payments to Greece if it refuses to implement the program. A Greek parallel currency to the euro, which Mayer called a "Geuro," could emerge as the government issues IoUs to meet payment obligations. That would allow Greece to devalue without formally exiting Europe's monetary union and "keep the door open to a future return to the euro," said Mayer, who used to be chief economist to the bank and is now a senior adviser. 

What do European leaders want? 

Euro region officials say they want to keep Greece in the euro, though policy makers say that the country can't be forced to stay if voters reject austerity measures. German Finance Minister Wolfgang Schaeuble told the Rheinische Post in an interview published May 11 that the euro region would be able to cope better with a Greek exit now than a year ago.