While everyone and their mommas have been spending the last few days debating whether a Grexit would be good for the euro or not, let's take some time to figure out what this scenario could mean for Greece and the financial markets as a whole. Here are some reasons why a Grexit might not be such a good idea:
1. Things could get really messy.
One of the biggest problems about having a country exit the euro zone is that this feat was neither planned for, nor has ever been attempted before. Who knows what can happen? For all we know, the situation could get even messier than Big Pippin's room - and that's saying a lot!
If Greece gets booted out of the euro zone, they'd have to revert back to using the drachma and this alone is a daunting task. The Greek government would have to make sure that this process goes through without a glitch in order to prevent a flight of capital and social unrest. Now that's a tall order considering how Greece can't seem to come up with a stable government to begin with.
2. A bank run could take place in Europe.
Even if Greece manages to reintroduce the drachma, a massive capital outflow from Greece is still very likely as financial institutions and investors won't be willing to put their money in such an unstable environment. With the rest of the PIIGS nations being touted as next in line to exit the euro zone, large amounts of money are likely to flow out of these countries as well.
3. It might lead to a euro zone break-up.
Economist Nouriel Roubini pointed out that, unless Portugal and Ireland are able to restructure their debt successfully, they could wind up following Greece out of the euro zone. Although he mentioned that an exit by these smaller countries probably wouldn't disrupt the entire region or the global financial market, he also remarked that the existence of the euro zone would be in jeopardy once the bigger debt-ridden countries such as Spain and Italy think of leaving.
On top of that, the ECB and several euro zone countries hold a part of Greece's debt in their balance sheets, which means that a Grexit and the debt default that could follow would force them to realize large losses. And if the finances of the ECB or Germany are in shambles, who would be left to save the euro zone?
4. Another "Lehman tragedy" waiting to happen?
Several analysts are also worried that a Grexit would eventually lead to a Greek debt default, which could result in a credit freeze similar to what happened when the Lehman Brothers declared bankruptcy in 2008. At that time, banks were unable to absorb the losses and the chain of bankruptcies that followed, eventually leading to a financial crisis.
This time around, another financial meltdown could take place if investors, banks, and other governments are forced to accept losses from holding Greek debt. Firewalls could collapse, banks could refuse to lend, spending could be constrained, and another global recession could be possible.
Of course, Big Brother Germany is keen on preventing a full-blown crisis from happening, with analysts speculating that euro zone's top economy would come up with a "Grashall Plan" or a Marshall Plan for Greece. Under this proposed mega-bailout package, Germany and the rest of the euro zone nations could pool billions of euros in order to buy Greece more time.
Then again, another bailout package could be accompanied by stricter austerity requirements, which Greece is neither willing nor able to carry out. With that, it seems that a Grexit isn't a matter of if, but rather a question of when. Do you think that this will eventually lead to a global financial crisis? Let us know what you think by voting through the poll below!
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