Andreas Whittam Smith: What happens if Greece exits?

The risks and the pain could be mitigated. Banks have already cut their exposure

Share
Related Topics

Rather than wondering when Greece will renege on its debts and what the consequences would be, try the opposite question: what would have to happen for Greece to avoid default? The essential condition would be that the forthcoming general election, the second in a space of six weeks, would lead to the formation of a government capable of negotiating a less onerous refinancing deal with the country's eurozone partners. What is not widely understood is that such a Greek government would get a sympathetic hearing.

Admittedly, the signals are mixed. On the positive side of the balance, Jean-Claude Juncker, the Luxembourg Prime Minister who chairs the meetings of eurozone finance ministers, argued on Monday that he didn't envisage, "not even for one second, Greece leaving the euro area. This is propaganda." He added that he would be open to debating easing terms of the €174bn bailout, including extending dates to meet fiscal and economic reform by one year. Angela Merkel, the German Chancellor, said that "of course Greece can make it".

But, more negatively, her finance minister, Wolfgang Schäuble, perhaps playing "hard cop" to the Chancellor's "soft cop", warned that Greece would have to stick to its hardline austerity programme in order to continue to receive the bailout cash needed to pay government salaries and support troubled banks.

That is the most favourable scenario. There is, however, a darker version. In it, a new, aggressive Greek government would argue that letting Greece go would be "too dangerous" for the rest of the eurozone. This is because of the risk of contagion. If you let Greece go, then Spain would totter and perhaps Italy also. Where would it end? How many dominoes would fall? In this second scenario, the new Greek government would dare the eurozone finance ministers to cut off the supply of credit if the country failed to meet its obligations. This approach has been openly discussed by some of the leaders of Greece's political parties. Actually, I think there is quite a good a chance that the bluff would work.

For the political colouring of the eurozone's leaders is rapidly changing. Ms Merkel has just suffered what she described as a "bitter and painful defeat" in an important state election. Her Social Democratic opponent argued that absolute austerity was wrong. Then on Tuesday, the new French president, François Hollande, turned up in Berlin to meet the German Chancellor saying much the same thing. And in the Netherlands, traditionally a defender of financial rectitude, the tide is turning. Dutch voters, shortly to go to the polls, are becoming disenchanted with austerity.

Suppose, though, that no credible Greek government is formed and the "too dangerous" bluff fails. Greece does default on its debts and crashes out of the eurozone. We can now rephrase the question: what would have to happen for the risks and pain of this outcome to be mitigated?

As far as Greece is concerned, retaining the euro as legal tender alongside the drachma would slightly improve what would indeed be, from almost every point of view, a frightful situation. In fact in two of its neighbours, Montenegro and Kosovo, the euro circulates in parallel with the local currency and has provided a stabilising influence. A second essential measure would be to nationalise Greece's banks – which would have been rendered insolvent – so that money transfers could still be conducted safely and some flow of credit maintained.

With both these measures in place, Greece's problem of having to buy certain essential goods such as foodstuffs, medicines and oil on international markets with only a devalued drachma to offer in exchange might be eased. But for the majority of the population, life would become very grim.

For the rest of Europe, the first part of the answer to my question above is that, for some time, business executives, bankers, bondholders and investors have been acting as if a Greek default would happen in the very near future. Financial markets never hang around. They always rush towards the entrance or the exit according to which seems the more appropriate. In other words, we have already seen some of the consequences of a Greek default and got them out of the way.

Many banks, for instance, have cut their direct exposure to Greece and other peripheral countries. This is a no-brainer really. It comes under the heading of risks that you do not need to take, particularly when the upside is small and the downside calamitous. At the same time, many foreign holders of government bonds issued by the two countries next in line following a Greek exit, Spain and Italy, have already sold stock. It is calculated that they have lightened their holdings by nearly 20 per cent. At the same time, regulators have insisted that banks undertake contingency planning that models the wholesale collapse of the eurozone. Wouldn't sensible institutions do this any way? Yes, but regulators' tests are often exceedingly strict – which, in the end, turns out to be no bad thing. It forces radical thinking.

So the last question is this. All precautions taken, all mitigating factors recognised and planned for, would the shock absorbers put in place by the European institutions – with some financial contribution from the UK – work as hoped? First in line is a €500bn eurozone rescue system, the European Stability Mechanism. The problem is that while big enough to give support to Spain should it be forced to the brink of default, it could not cope with Italy as well.

At this point, all eyes would turn to the European Central Bank (ECB). But that, in turn, would mean looking towards Berlin. For the various rescue measures that the ECB could take would require German support. It could buy Spanish and Italian bonds, for instance, when otherwise there would be no ready market. It could again flood European credit markets with liquidity as it did a few months ago. Classically, such actions would weaken incentives to reduce government borrowing and would give a boost to inflation over the long term. Both outcomes appear as nightmares to the Germans, but in the end, I believe, they would go along. If it were necessary, they would bend their principles to save the euro.

a.whittamsmith@independent.co.uk

React Now

  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

Recruitment Genius: Client Services Assistant

£18000 - £20000 per annum: Recruitment Genius: A Client Services Assistant is ...

Recruitment Genius: Junior / Senior Sales Broker - OTE £100,000

£20000 - £100000 per annum: Recruitment Genius: This is an excellent opportuni...

Recruitment Genius: Duty Manager

Negotiable: Recruitment Genius: A Duty Manager is required to join one of the ...

Recruitment Genius: Team Leader

Negotiable: Recruitment Genius: A Team Leader is required to join one of the l...

Day In a Page

Read Next
9.4 million people watched the first of the three-way debates at the last election. The audience for the one on Thursday is likely to be far lower.  

David Cameron needs to learn some new tricks – and fast

Steve Richards
The 2010-formed Coalition was led by a partly reformed Conservative Party, checked and balanced by Nick Clegg  

How did the Coalition ever manage to work together so harmoniously?

Isabel Hardman
No postcode? No vote

Floating voters

How living on a houseboat meant I didn't officially 'exist'
Louis Theroux's affable Englishman routine begins to wear thin

By Reason of Insanity

Louis Theroux's affable Englishman routine begins to wear thin
Power dressing is back – but no shoulderpads!

Power dressing is back

But banish all thoughts of Eighties shoulderpads
Spanish stone-age cave paintings 'under threat' after being re-opened to the public

Spanish stone-age cave paintings in Altamira 'under threat'

Caves were re-opened to the public
'I was the bookies’ favourite to be first to leave the Cabinet'

Vince Cable interview

'I was the bookies’ favourite to be first to leave the Cabinet'
Election 2015: How many of the Government's coalition agreement promises have been kept?

Promises, promises

But how many coalition agreement pledges have been kept?
The Gaza fisherman who built his own reef - and was shot dead there by an Israeli gunboat

The death of a Gaza fisherman

He built his own reef, and was fatally shot there by an Israeli gunboat
Saudi Arabia's airstrikes in Yemen are fuelling the Gulf's fire

Saudi airstrikes are fuelling the Gulf's fire

Arab intervention in Yemen risks entrenching Sunni-Shia divide and handing a victory to Isis, says Patrick Cockburn
Zayn Malik's departure from One Direction shows the perils of fame in the age of social media

The only direction Zayn could go

We wince at the anguish of One Direction's fans, but Malik's departure shows the perils of fame in the age of social media
Young Magician of the Year 2015: Meet the schoolgirl from Newcastle who has her heart set on being the competition's first female winner

Spells like teen spirit

A 16-year-old from Newcastle has set her heart on being the first female to win Young Magician of the Year. Jonathan Owen meets her
Jonathan Anderson: If fashion is a cycle, this young man knows just how to ride it

If fashion is a cycle, this young man knows just how to ride it

British designer Jonathan Anderson is putting his stamp on venerable house Loewe
Number plates scheme could provide a licence to offend in the land of the free

Licence to offend in the land of the free

Cash-strapped states have hit on a way of making money out of drivers that may be in collision with the First Amendment, says Rupert Cornwell
From farm to fork: Meet the Cornish fishermen, vegetable-growers and butchers causing a stir in London's top restaurants

From farm to fork in Cornwall

One man is bringing together Cornwall's most accomplished growers, fishermen and butchers with London's best chefs to put the finest, freshest produce on the plates of some of the country’s best restaurants
Robert Parker interview: The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes

Robert Parker interview

The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes
Don't believe the stereotype - or should you?

Don't believe the stereotype - or should you?

We exaggerate regional traits and turn them into jokes - and those on the receiving end are in on it too, says DJ Taylor