Greece needs to leave the euro right now

Greece Europe nein euro grexitReuters/Alkis KonstantinidisA man cycles by fresh anti-EU graffiti in Athens, Greece.

It’s about time Greece left the euro — it’s the only way to stop the country falling further into a black hole of debt anda ravaged economy.

Greece has too much debt. In fact, it’s “highly unsustainable” according to the
International Monetary Fund, and the only way the country will remotely have a chance of getting this reduced is by a Grexit.

Even Germany’s finance minister Wolfgang Schaeuble confirmed this thought on German radio this morning, when said unequivocally that debt forgiveness is “not possible” while a country is still inside the euro. In the same breath, Schaeuble admitted that it is unclear Greece would be able to restore the country’s finances without an exit. He went onto say that a temporary Grexit, therefore, “would perhaps be the better way for Greece.

And this is a pertinent point.

Greece needs to get its debt reduced in order to legitimately start repairing its economy instead of gutting it from the inside out with austerity measures that don’t seem to have an expiry date.

Greece will implode without a debt reduction

Greece euroGettyA supporter at a Greek football game.

Late last night, Greece’s parliament approved the bailout package presented by prime minister Alexis Tsipras.

The deal is far worse and more austere on what the nation voted “No” on in the bailout referendum on July 5. Not only has the Syriza-led government agreed to a number of extremely austere measures, such as further pension cuts and labour reforms, it’s also being forced to chop up and sell parts of the country to the private sector so it can recapitalise the battered banking sector.

While Tsipras can now begin working with Greece’s European creditors to get an actual bailout and funding back to the Greek economy, which has basically been shuttered in the last 2 and a half weeks, this does not solve the riddle of how on earth the country is going to keep on borrowing and adhering to conditions for the long term.

People are still going crazy over the IMF’s damning report on Greece’s bailout deal — the one that the nation is being forced to swallow — because it confirmed that the beleaguered country cannot go on like this.

It’s stuck in a vicious circle. Greece’s debts are way to high to maintain and it has no money to pay its debt back. So it needs to borrow more money from the same people it owes money too to keep going. However, in turn, it has to excavate the country’s assets and dismantle its market structure and start again to help put the country in a better financial position.

However, there’s no real way in making money, so it will forever be in debt. Also because Greece is in the monetary union, it’s not in the interest of the creditors stimulating the economy too much because it could cause too much inflation in countries like Germany.

The IMF called Greece’s debt “highly unsustainable” for this reason and highlighted:

  • Debt will peak at about 200% of gross domestic product in the next two years, not the 177% that was thought last year.
  • Debt will also fall more slowly. The IMF wanted it down to 142% of GDP by 2022, but it now expects it to fall to just 170%.
  • The IMF had expected Greece to spend less than 15% of its GDP on debt servicing, judging this to be sustainable but “highly vulnerable.” Now that’s out of the window, and payments will be much higher.

Tsipras can celebrate this morning that parliament approved the debt package but as my colleague Mike Bird pointed out yesterday, as well as a raft of analysts, no one really believes that Greece’s bailout plan will be a success. In fact, it’s tipped to fail miserably because of this debt conundrum.

Nomura’s chief economist Richard Koo said in a note on Tuesday that the EU “refuses to acknowledge mistakes made,” “refused to accept responsibility for this collapse in [Greek economic] output,” and says the both the IMF and EU’s negotiating position was based on “highly unrealistic” assumptions.

Greece maybe forced to switch to drachma any way

Greece is desperately hanging onto staying in the single currency but it may be forced back to the drachma anyway.

Before the referendum, it was reported that Greece’s banks were down to their last €500 million (£356 million, $US553 million) in cash. This is barely enough to keep the financial system going.

The government already defaulted on a €1.6 billion (£1.1 billion, $US1.8 billion) payment on June 30, and ravaged its already-low credibility and credit ratings. It defaulted again this week on another IMF debt payment, worth €450 million (£316 million, $US495 million). Greece has to clear its arrears payments before it can receive more bailout money. But it needs to borrow more money to pay back its debts to recapitalise its banking system.

We already know that it’s nearly impossible for Greece to raise
the €50 billion (£35.14 billion, $US54.82 billion) figure for privatisation revenues floated by the creditors, so where does it leave the country?

Greece’s debt conundrum means the country could find itself borrowing just enough to be put on financial life support but not enough to leave intensive care. It’s hanging onto the currency union by a thread.

So why not bite the bullet and leave, so it can actually get its debt reduced and be in a better place to become a normal functioning economy again?

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