Recently, word savvy analysts coined the term “Grexit” to describe the risk of Greece getting booted out of the euro zone. And I must say, this couldn’t have come at a better time. After all, following the failed Greek elections, the threat of a Greek exit is as real as ever!
In the recently concluded elections, PASOK and New Democracy, the only two major parties that are pro-EU/IMF bailout, failed to secure a majority in Parliament. Together, they bagged less than 33% of the total votes and just 149 out of the Parliament’s 300 seats.
You don’t have to be a math whiz to figure out that this leaves anti-austerity parties with almost 70% of Sunday’s votes. This isn’t the first time that the Greeks have shown their displeasure for austerity measures either. Last year, citizens took to the streets in violent riots to protest the government’s budget cuts and express frustration over Greece’s high unemployment, wage cuts, and the overall weak economy. This time around, it seems they’re letting their votes do the talking.
Now, Greece only has a couple of days to form a coalition government that will present the Troika (European Commission, European Central Bank, and International Monetary Fund) with budget savings worth 7% of GDP by the end of June to secure the next tranche of its 174 billion EUR bailout program.
According to EFSF head Klaus Regling, it would be catastrophic… and not just for Greece! Methinks that a Grexit could increase pressure on Portugal and other debt-stricken countries as it would put them in the hot seat. A Grexit could even spill out of the euro zone as a series of European debt defaults (contagion!) could put the whole of Europe into recession. I imagine that would be catastrophic for the euro as well!
It’s no secret that many regard Greece as the weakest link in the euro zone. After all, it had to get bailed out twice because it almost ran out of cash. And so, some economic gurus think that if Greece left the euro zone, there would be fewer fiscally-troubled members to worry about. Only those who are better at keeping their balance sheets healthy and meet the stringent demands of the EU will be left.
If you look at the statistics, I guess you could say that the euro zone doesn’t have much to lose if it weeds out some of its debt-ridden members. For instance, Greece and Portugal barely even contribute 5% to the region’s GDP. With that in mind, these economic gurus say that Germany might as well just start making preparations to help make Greece’s transition back to the drachma as smooth as possible.
Despite the optimism about a Greek exit though, kicking the country out the bloc is easier said than done. The reasons I enumerated almost a year ago why Greece just can’t leave the euro zone are still pretty much true today. For one, Greek bondholders, which include other European countries as well as the ECB, will have to stomach huge losses as they incur write-downs.
This is probably why most market junkies overlook the possible advantages of a Grexit and instead focus on the repercussions it could bring about in the coming months. Heck, some analysts even predict that we could see EUR/USD tumble to 1.2500 within the next quarter if risks of a Greek exit continue to rise.