Being part of the euro system has been both a blessing and a curse for Greece. On the one hand they’ve had the advantage of a major international currency and the implied backing of other Eurozone nations.On the other hand, some of Greece’s debt problems have been exacerbated by the nations inability to independently devalue its currency or change interest rates in response to crushing debt levels.
Yet Morgan Stanley’s Emma Lawson points out that whether Greece likes it or not, at this stage they must stick with the euro. If they left today, the country’s already disastrous debt problem would become an outright catastrophe due to euro-denominated liabilities:
Morgan Stanley: However, Greece can neither raise interest rates nor directly weaken its currency, thus increasing the internal pressures. This highlights the pressures on the EUR, should the situation in Greece worsen. It also highlights why Greece would be extremely unlikely to want to exit the common currency – as the likelihood of an extremely sharp depreciation of Greece’s new currency would be high. With liabilities in euros and free capital flows, it would be an extremely difficult economic position for Greece to be left in.
Exhibit 3 shows the rapid increase in the ratio of short-term external debt to reserves, while Exhibit 4 shows Greece’s relatively lower level of reserve assets to GDP. In the event of a sudden withdrawal of capital, Greece would have a difficult time preventing a currency crisis, if it were not in the common currency.
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Which means that, ultimately, Greece has no choice but to do exactly as they are told by the Eurozone.
(Via: Morgan Stanley, Olympian task, Emma Lawson, 11 Feb 2010)