The potential reintroduction of the Drachma would likely be regulated by Greek authorities. Among the main questions will be the confidence in the Drachma. It could well be that even local businesses continue pricing themselves in Euros or even US Dollars, as the Drachma is poised to continuous devaluation. Regarding the ripple effects on world market the exist of Greece could well encourage other peripheries to follow suit and opt out of the Euro. It will certainly give ammunition to weaker European economies to soften austerity cuts, which will make it extremely hard for the ECB and the IMF to continue funding banks and ultimately governments.
The cost of borrowing could sky rocket for weak economies causing another credit crisis and a possible drought of funding. So what happens if Greece can't fulfil these payments? Capital Economics, a consultancy that won the Wolfson prize in for its plan of how Greece could leave the euro, Barclays and Oxford Economics have all discussed this in recent research notes:.
The short-term effects would be painful and fast, but Oxford Economics analysts note that Greece "might be better off leaving the Eurozone in the long term". Capital Economics similarly argues that a well-managed exit "could even end up as a favourable economic development for both Greece and the rest of the euro-zone".
And for the rest of Europe and the world, Wells Fargo analysts think that the effects may be manageable:. Of course, financial markets may react negatively if Greece were indeed to leave the Eurozone, and we worry that contagion could spread to other European countries.
In and , Greece's fate seemed closely tied to the rest of Europe. Losing Greece would have signalled the first domino falling, followed by perhaps Portugal, perhaps Spain or Italy, unravelling the whole project. Right now, however, Greece looks like its own separate case, and very few people think that Grexit would force that chain reaction. Sign Out. Crowds are beginning to gather in the squares of Athens waiting for the official result in Athens, Greece.
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The damage it's doing to more significant countries such as Italy is immeasurable. My glass is half empty on this. France and Germany are in the most vulnerable positions. Although UK banks are not huge directly exposed, indirectly they will be affected and that's hard to unravel and assess the risk we face.
My colleagues on the Guardian's datablog compiled this back in June documenting the banks that are exposed to Greek debt.
It shows that after Greece, France, Germany and Belgium's banks are most vulnerable. The table below shows the banks most exposed as of June this year. I've just looked up the evidence that Mervyn King left gave to the Treasury select committee that Alan Clarke mentions; you can read it here. He makes clear that there have been contingency plans put in place by the UK government but doesn't go into the specifics.
He says:. If you look at the provisions for liquidity insurance that we have put in place for our own banking system, they are radically different from the ones that were in existence in the summer of , when the financial crisis began. We learnt from that experience, and we have put in place now special auctions for liquidity, which we can introduce immediately if we need to. Larry Elliott, the Guardian's economics editor has just filed this in which he explains the European politics behind the possibility of a Greek exit from the euro - and raises the possibility of the break-up of the eurozone.
Dawn Holland and Simon Kirby write:. In such circumstances, devaluation is certain, and explicit default is also likely. This would lead to lower interest payments on government debt, and lower asset prices could also result in capital inflows. Under such a benign scenario, output would rise, perhaps quite sharply, much as it did in similar circumstances in Argentina in On the other hand, there are very large downside risks in particular, the difficulties of full currency redenomination, and the possibility of forced EU exit that were not present for Argentina.
I asked Dawn Holland to expand on this a bit for me, and she gave me a slightly more optimistic view, but not much. Argentina was a dollar based country and they reintroduced the peso in They converted all bank deposits into the new currency overnight. There was a massive disruption, capital flew out of the country. But over time capital began to flow back in. They had a relatively successful outcome. The Argentinian case is the best possible outcome with capital flowing back in.
You would expect this new currency is going to devalue massively. For people outside of Greece paying in euros or other currency suddenly Greek assets look relatively inexpensive and people could start to invest. There is risk attached to that, but if devaluation is big enough, you can expect investors to see this as a profitable place and put their money in. That's the best outcome. The worst case is that the risks are too great, nobody puts money in, and Greece is completely cash strapped.
They won't be able to pay back their debts. If we don't get foreigners stepping in to buy up the domestic businesses, then Greece's economic outlook is much worse off. But the point of getting your own currency is that you can just print the money to pay off your debts.
If they had their own currency and central banks they could just print the money for their debts. In the short term you can do that. That leads to high inflation and it's not really viable for any longer period of time. I think things would be a lot worse off to leave to monetary union. But if you look at the Argentinian experience there is a potential outcome which would put Greece in a better position. I wouldn't write that off.
There's no guarantees that we will end up in that position and risks are so high. It's a very high risk strategy.
The risks are: inflation, devaluation, banking collapse. But that's possibly going to happen now anyways. Once the policy is on the table as something to debate, it is very likely we will see a run on the Greek banking system.
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