Various politicians and experts reassure us that it is not possible for Greece to exit the Eurozone because the Treaties have not made provision for a country’s voluntarily exit or removal from the Eurozone.Hence, they reassure us by saying: do not worry, it is not in the European Union’s interests for Greece to exit, and they will not persist in their claims otherwise they will go down themselves.
Others claim that “none of the powerful countries in Europe wish for Greece to exit the Euro, which was made clear by Merkel and Sarkozi’s statements.” Therefore, we are unhindered.
There are also those who believe that, one way or another, the Eurozone will at some point collapse. Consequently, we do not need to abide by any restrictions.
The belief that the limits to our own initiative were much wider than, in truth, they turned out to be, ultimately led to complacency. Measures imposed at political cost were postponed or modified.
When the sixth tranche of the loan was not paid in mid-September, it came as a surprise to us that our partners have quite different views from us in relation to what needs to be done. Crises are not solved by either groundless hopes or fantasies. Awareness of the reality is a fundamental precondition for dealing with them.
The Treaties indeed make no provision for taking a country out of the EMU. However, only those who turn a blind eye can believe that there’s no risk for Greece. The reality of the functioning of the EU determines the framework for a country remaining in or exiting the Eurozone; this is why it is important to look ahead and not be complacent. Any reassurances given by European leaders are binding to the extent that Greece abides by its obligations. If it does not satisfy the agreements – as they claim is the case – then those reassurances are not valid.
The July’s 2011 agreement ensured additional funding for Greece and partial debt restructuring in order to facilitate the country’s return to the markets in 2014. This agreement indicates the plan pursued by the Union’s leading core members. By 2013 or later, the new European Stability Mechanism (ESM) hopes to offer a permanent solution to the problem posed by the high-debt countries based on the constitutional provisions of the Mechanism according to which any country which have sustainable debt, namely those countries that still have the option of tapping the markets, will continue to be supported.
Other countries, whose debt is not sustainable, have to find their own way themselves. New funding will only be given for an exceptionally limited time. Countries unable to overcome their difficulties will enter a procedure of controlled default. The aim will be to limit the negative impact on the European banking system.
Controlled default means controlled behaviour of the creditors; agreement between the creditors and the country in debt on debt restructuring, namely on an extension of the time or repayment, and the limitation of bank claims (a ‘haircut’); regulations guaranteeing settlement such as the assignment of the community program funds to the banks; and new regulations on payable interest. Controlled default implies the voluntary temporary exit of the defaulting country from the Eurozone.
Staying would mean continued turmoil caused by the weakness it brings to the value of the Euro. The Euro would immediately lose value against the dollar or the pound which would result in investors taking flight to other currencies. The Eurozone would abandon its ambition to be one of the most powerful and competitive economies. Germany, France as well as other countries are not willing to suffer the consequences of such a development. They will react against those who over-borrowed without meeting their obligations.
Besides, “Voluntary exit” is the logical consequence of a system wherein everyone is obliged to abide by specific rules so that it can properly function. If anyone refuses to apply them and acts on their own, the system will either dismiss that nation or it will contradict its own mission. Self-contradiction by the Eurozone as a result of a small peripheral country is not going to happen. The other member states did not invest extensive resources and efforts into the EMU just to accept a member’s indifference to common regulations.
These conclusions clearly respond to the allegation that it is not “legally” permitted for a country to exit the euro. The legal regulations pertinent to our exit have already been materially determined. Therefore, Greece’s future in the Eurozone will be determined by 2014 at the latest. The time we have left in which to avoid being expelled is approximately three years at most, and only that long on the condition that no further accident occurs in the intervening period.
It must be noted at this point that scenarios involving the acceleration of procedures have already started circulating within the Eurozone. The Mechanism is already intended to start operations as of the first half of 2012 instead of the second half of 2013. In that case, the time available for reversing our negative course will be limited.
Suspending our participation in the Eurozone will most probably mean a return to the drachma. The exchange rate of the new drachma against the euro will be far below the old exchange rate at the time of our entrance to the Eurozone (1 Euro = 340 drs). One Euro will equal six hundred drachmas or more. The exchange rate for new drachma will finally be determined by the markets after successive deprecations.
As Greeks, we will lose a significant percentage of the value of our money; employees will lose a large part of their purchasing power. The prices of imported goods will increase depending on the extent of the depreciation. Many domestic products will also track this steep price increase since most raw materials are imported. Recovery will be totally uncertain for a long period of time because growth, which is already weak, will remain hampered.
Controlled default and eviction will possibly happen together with the promise of speedy return to the euro. Nevertheless, it will most probably be just as dramatic as an uncontrolled default. It took one whole year of preparations for the Euro to come to Greece. For the drachma to re-circulate, it might turn out that not even a single day’s preparatory work gets done. As soon as it is known that departure from the Euro is on the way, panic will hit the market. Banks and depositors will immediately try to gather up as many Euros as possible in order to send them abroad or to save them.
This certain panic will not be the only impediment to changing the currency. Our banking system is oriented towards the Euro as regards its management, software, computers, and training. Any change required in order to function on the new currency requires high costs and an enormous amount of time. Speculation, frauds, and insecurity will prevail. Our external debt will then have to be repaid in Euros and will be increased immediately by the depreciation rate.
The debts of Greek companies doing business abroad will possibly double overnight. Public debt will reach astronomical levels. Whatever the extent of the restructuring effort, repayment will remain problematic. In 1996, Greece was still repaying debts that dated as far back as the 1900. Most likely, our grandchildren will also be repaying debts that will have been agreed decades before they were born. There will be a redistribution of wealth and income without rules or moral justification. Social unrest will be intense and the anger will be proportionate to the unprecedented poverty and unemployment.
There will be hesitation, suspensions, last-minute efforts by Eurozone itself to avoid expelling a member state with disastrous consequences for its economy. However, they will not use the same rescue recipe: new loans, new promises made by Greece, new guarantees, new monitoring by the Troika. The last step will be compulsory administration, having a trustee in bankruptcy doing all the decision-making on issues which concern us, determining which part of the funds will be paid to creditors and which part will remain in the country, determining procedures so as to implement this last resort at the least possible cost for everyone.
This post originally appeared in Kathermini, a Greek newspaper.
Certain scenariosThere are, of course, other possible developments which are extremely dependent on the course of the European and international economy, the limitations imposed or the powers granted.
The eligibility criteria for each solution are mainly found in the cost of such a solution for the Eurozone member states, in the damages suffered by their banks, and in the banks’ potential recapitalization.
A particular solution which is optimal at a given point in time may be inappropriate in another context. Let’s have a look at some scenarios.
Suppose our European partners and the IMF do not pay two or three consecutive tranches because we do not satisfy our commitments. What will happen then? The State will turn to the international markets to ensure financing, but it will not be able to get credit because foreign banks will ask for more than 40% interest. Consequently, the State will not have the funds either to repay the matured loans or to cover its current needs.
The future will depend on the Eurozone’s reaction. It will have various possible outcomes. If the Eurozone wishes to avoid turmoil due to the default of a member state, but at the same time to be consistent with the pre-agreed conditions, it will have to proceed with the final settlement by giving Greece one last chance. It will decide on an extended debt restructuring, namely the drastic limitation of Greek debt at a percentage much higher than the 21% haircut provided for under July’s agreement.
The European Financial Stability Facility (EFSF) will provide new bonds to the bondholders with the corresponding price significantly lower than their nominal value. The EFSF will be the guarantor. Greece will be obliged to make the debt viable, under the strict supervision of the EFSF, until 2013/2014. Provided the debt is considered to be viable, supervision will continue for several years so as to ensure repayment thereof.
Banks will suffer losses from restructuring because they will lose a large part of the value of the bonds they hold. By that time they will have been recapitalized or financed by the EFSF to cover part of their losses. The big benefit to the Eurozone will be an end to the insecurity and the effective entrenchment of the risk.
It is also possible that the Eurozone will decide henceforth to pay tranches not to Greece directly, but to the banks that have given us the loans in order to ensure repayment of our debts. In this case, we will not experience immediate and permanent suspension of payments, since the debts will be repaid; thus EU banks will be released from carrying Greek toxic debt which will be borne by member states. The risk of Greek default causing turmoil to the European banking system will be under control.
This solution will not avoid domestic turmoil. The Greek state will possibly not have sufficient funds to pay salaries, pensions and other obligations for the state to function. In order to confront this extraordinary situation, it will possibly pay employees in debt certificates (bonds); public enterprises will pay their employees, and private enterprises will pay their suppliers.
At that point, it is possible that either the EFSF or ECB will intervene providing funding to the banks and, indirectly, to the Greek State. Such an action will aim to lead Greece smoothly to the procedure foreseen by the ESM. The ESM will take the final decision regarding future developments.
Finally, if the Eurozone does not agree to intervene as above and continues to refuse to pay tranches, Greece will suspend payments and will negotiate on the default terms. It will be an uncontrolled default. Creditors will demand in any possible way the total amount with no discount and no delay. Greece will be cut off from international transactions for a very long time.
The possible developments will have to be complemented by the finding that Greece will constantly be exposed to the risk of an unexpected or unforeseen event. A new global recession, a new international banking crisis, intense disputes between EU members on the economic governance of the Eurozone will increase the feeling of insecurity and will adversely affect support for our problems.
The conclusion from examining the various scenarios is that a smooth course for the country presumes the smooth payment of tranches by our creditors and our fulfillment of the terms set upon us. Every time we break an agreement, this will lead to even more strict supervision. Every improvement we make will increase our power to negotiate.
This was confirmed during Merkel’s meeting with the Prime Minister on Tuesday last week. “If you want us to support you, then you must take every necessary measure”, was the Chancellor’s friendly, but decisive, refrain. Claims that we should free ourselves from the Eurozone’s support, or that we should imitate Argentina which “is doing well”, or that we should “say no” to our creditors or that we should renegotiate the overall problem with the Eurozone, are quixotic. Exit from the EMU must be avoided at all costs. It will be disastrous.
The question of whether we can alter the oppressive terms to limit the suffering has already been answered via the developments. Both the July agreement as well as the rejection of Greek positions in September demonstrated that all negotiations require convincing performance and proper planning. If this is not the case, it will lead to a dead-end.
With appropriate planning we must seek an agreement capable of being implemented to the benefit of all parties, including our country. Greater importance should be given to development and growth. Measures should be fairer for those on lower incomes. We need an approach different from the one demonstrated so far.
Are there no bridges?
Continuous meetings between the Prime Ministers and the Ministers of Finance do not necessarily lead to policy changes. There is no time for talk during the Committees. Everything has been prepared in advance almost down to every detail. Anything new is kept secret by the participants. Common plans are the result of free discussions between high-level executives of political leaders based on instructions, away from the media, without statements but with thorough investigation of all possibilities.
Of course, they discuss specific plans and not vague wishes or political wishful thinking. In order for the country to join the EMU, ongoing preparatory informal contact and open discussions between the partners and the ministers took place for years. Today it seems as if there are no bridges.
Bridges exist when you recognise the problem of the interlocutor. Northern countries are concerned about the eminent risk of them being drawn into the crisis by the peripheral countries. We need to convince them that we are interested in effectively dealing with the crisis. In February 2010, we had promised privatizations. Those have not been proceeded with yet.
We had suggested the sale of our assets amounting to 50 billion Euros. We have not managed yet to collect 1 billion. We have not exploited the NSRF funding. Greece has created the conviction to its creditors that it does not keep its promises because it believes that, one way or another, things will take care of themselves without radical changes.
Extraordinary procedures and effort are needed. If everything is dealt with using the usual bureaucratic methods, the result will remain zero; and we will get zero support. The prospect of recovery will remain alive if we work consistently, with a plan and with a strong will.
It is, therefore, time to stop hallucinating over our possibilities, stop the legalisms and invocations over principles and values in the Union – which we were the first to ignore. The ostrich syndrome does not suit us. The ostrich hides its face because it cannot handle facing the truth. Let’s look at the situation with honesty and self-awareness, this is the only way we will be able to formulate the means to confront it.
This post originally appeared in Kathermini, a Greek newspaper.
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