What Would Happen In Case Of Grexit?

Tyler Durden's picture

Submitted by Pieter Cleppe, of the independent think tank Open Europe in Brussels

What would happen in case of Grexit?

In order to “help” Greece, since 2010, we’ve seen fiscal transfers and foreign intervention into its domestic economic policies. Greece’s debt to GDP ratio is now around 180% to GDP, while a lot of the bailout cash has merely served to bail out banks, as Open Europe already warned in 2012.

A number of policy makers now wants to try something new: a Greek exit from the Eurozone. One of them is Christian von Stetten, a Member of Germany’s Parliament and of Angela Merkel's CDU. He states what a majority of Germans believe should happen: "The experiment with the Greeks in the eurozone, who are unwilling to implement reforms, has failed and must be ended". He adds that he's in favour of providing "many billions" in support so Greece can make the transition onto its own currency.

Hereunder I explore what would happen if Greece were to leave the Eurozone, through a legal fudge.

1.    Default

If Greece wouldn’t have already defaulted before it would introduce a new currency, Grexit would  make it virtually certain that the country would default. It’s not wise to take out a considerable loan in a foreign currency, but that’s what Greece has done since 2001, when it entered the Eurozone. If Greece would introduce a new currency, which then likely would lose value against the euro, it would still need to pay back its debt in euro, which woud appreciate in value as compared to the new Drachma, making this task even harder.

If Greece would only pay back what it owes in a new, devalued currency, this would be considered a default.  As a result, the Greek government would face higher borrowing rates in the future. In theory, the fact that it wouldn’t be burdened by an excessive 180% debt to GDP may serve as a factor countering this, giving that the financial situation of the government would look more rosy. But this ignores the second aspect of Grexit, which I’ll discuss next.

2.    The Greek banking system would be cut off from the ECB’s cheap money canal, with real austerity to follow

A default would only relieve Greece from its excessive external public debt burden, not from the exposure it has to its banking system. Almost half the “capital” in the four largest Greek banks really consists of “deferred tax assets” or discounts on future tax bills. When banks make no profit, they won’t enjoy such discounts.

Moody's has estimated that at the end of April, 32% of total assets of Greek banks were derived from central bank funding. This was 12% in September and estimates put it at close to 50% today., with bank deposits at their lowest level in 11 years, below 130 billion euro. As Greeks withdraw deposits from their banks, using the money to buy hard assets like cars, whose sales have risen, the ECB still makes sure Greek banks enjoy sufficient liquidity, by allowing the Greek central bank to create euros itself through the system of “emergency liquidity assistance” (ELA), which should only be allowed to prop up solvent banks. Some five billion euros was withdrawn from Greek banks last week, with the ongoing bank run forcing the ECB to decide on increasing or maintaining the ELA – lifeline for Greek banks on a daily basis now.

The ELA loans to Greek banks are in theory a risk for the Greek central bank, and not for the ECB, but of course any new euro which wouldn’t have been created in “normal” circumstances reduces the value of the existing stock of euros, representing a transfer to those who withdrew the cash. Also those who didn’t withdraw don’t need to despair, as a Greek euro exit would signify a goodbye gift for the Greek economy, a “dowry”, as German economist Hans-Werner Sinn has put it. With Open Europe, we already warned in March that a bankrun may drive the eurozone to support capital controls, in order to stop this. In one wants to know what would happen if every central bank in the eurozone would do what the Greek central bank is doing, perhaps it's interesting to have a look at the breakup of the Ruble zone.

ELA is not the ordinary way for the ECB to shower Greek banks with liquidity. The normal way of doing business is for Greek banks to provide the ECB with - shaky - collateral, as Greek government debt, in return for cash. As a result, the ECB has been building up considerable exposure to Greece through the so-called “Target2” payment system, which makes it again less appealing to go for Grexit.

Importantly, the ECB announced in February it will – finally - no longer accept Greek government debt as collateral, forcing banks to their last resort - Emergency Liquidity Assistance. The ECB also imposes a discount on the collateral posted by Greek banks to get their ELA cash from the Greek central bank - making it harder for banks to get the cash. Will the ECB cut off funding for Greek banks if Greece defaults? An insider, quoted by Reuters, seems to think so, saying that "If Greece declared default, everything would change. It would be very hard for the ECB to authorize financing with collateral of a debtor in default."

To make a long story short: when a country enters the Eurozone, having access to the ECB’s cheap money provision is without any doubt one of the most important elements of Eurozone membership. That this cheap money may one day be used by the ECB to exert political influence, can be confirmed by former Italian PM Silvio Berlusconi, who was toppled by the ECB’s ability to affect Italy’s borrowing rate, according to some. The ECB now also uses it to pressure Greece into bowing to its demands, as it has been doing to Cyprus and Ireland. Perhaps Paul Krugman may not agree with it, but in the real world there is no such thing as a free lunch.

After euro-accession - or actually since it became clear they’d join the Eurozone, given the expectation effect-  Greek, Italian, French, Belgian, Spanish and Irish banks were suddenly flooded with cheap money, whereas before they faced higher interest rates. As a result, investments were being made that would otherwise not have been made, with very considerable economic distortions as a result. In the case of Greece, Italy and Belgium, much of the cash went to public spending. In the case of Ireland and Spain, it went to unsustainable private spending, ending up in a gigantic real estate bubble and bust, very high private debt rates and broken banking systems which have only partially been cleaned up. The ECB could have partially countered this, for example by not gradually loosening up collateral requirements for banks to get ECB cash over the years since 2008, but at the end of the day, it was inavoidable.

If the ECB would cut off or limit funding for Greek banks to the point where the bank run couldn't be dealt with, a bank holiday would be called. Greek banks would be restructured. Shareholders would lose everything, just like bondholders, and depositors would either lose a part of their deposits or would receive them in devalued Greek currency. Parallel currency solutions may be tried, transition bailouts may be given, but in the end the cheap money party would be over.
Most analysts of Grexit are concerned about how this “Corralito”, as a similar episode in Argentina in 2001-2002 has been dubbed, would play out, but that’s not even the most risky aspect of Grexit.

The Greek state, strongly reliant on the  ECB, through the Greek banking system, wouldn’t be able to pay salaries and pensions any longer. Dismissals of public servants, cuts into their salaries to Balkan-style levels, or both, would become necessary, whether Syriza would survive in power or not. To predict that this will never happen without very serious protests isn’t hard. But depending on the size of transition bailouts, it would be possible to smooth out this process over time. Those who really care about ending the clientelist system in Greece, to which Syriza may be taking part, should rejoice. In the same way that Georgia managed to reduce state corruption and boost economic growth by simply cutting the number of government workers by 50% and reducing the state's role into the economy, Greece may achieve the same success. To end Greek access to the ECB's cheap money canal may not be a sufficient condition for this to happen, but it is probably a necessary condition. Higher interest rates would secure that Greek politicians would no longer be able to burden their citizens with ever more debt.

3.    Depreciation of the new Greek currency

As explained, the main problem of Greece’s Eurozone membership wasn’t so much the fact that it had an overvalued currency, but rather that the euro served as a massive debt machine for the country. Still, the country did lose a lot of competitiveness, contributing to the inability to serve its debt obligations, after it entered the euro. One must give Greece credit for having partially restored competitiveness, through labour market reform, rising 48 places in the World Bank’s Doing Business report between 2010 and 2015. Given that the currency would lose value, economic sectors like tourism may benefit, but this effect has already been partially achieved by the efforts to achieve an “internal devaluation”.

It should be noted that the introduction of a new currency may well fail. This happened in Ecuador, leading the country to adopting the US Dollar as its currency. Montenegro and Kosovo already use the euro as their currency, without their banks having access to the cheap money canal of the ECB. If the ECB cuts off Greek banks, Greece will become like Montenegro. The good part is that politicians then won't be able to abuse the printing press to fund state spending. The bad part is that Greece would need to rely on these politicians to restore competitiveness. If Greece would have its own currency, investors could just sell it off in case the country's competitiveness would be in trouble. This would impoverish the Greeks, but it would also make them cheaper to hire. It would make it cheaper to go on a holiday in Greece. It really is a trade-off then: Becoming like Montenegro or like Turkey.

4.    (Long term) Contagion

The process of introducing a new currency may in theory set off immediate contagion: bank runs in Portugal, higher borrowing rates for Italy. However, the ECB can just print money in order to bail out Portugese banks and manipulate sovereign borrowing rates, through QE or other various instruments.

A more likely risk is long term contagion. Grexit would set a precedent. After Grexit, once another Eurozone state would get in trouble, much more money may be needed to assure that the country would stay in, for example Portugal. This may make it less likely that Eurozone countries would bail out Portugal, in turn raising attention to Italy and Spain, increasing the chance of a complete Eurozone break-up.

On the other hand, bailing out Greece once more also comes at a cost. It will emboldens these populists in countries like Portugal and Spain who’re hostile to the strings attached to the bailouts their countries have received or continue to receive indirectly, through the ECB's easy money canal. This in turn may make the wealthier Eurozone states, like Germany, less keen to provide more bailouts. It increases the chance of a Eurozone break-up.


Regardless of whether one thinks the Eurozone should be broken up or not: if it can only survive through continuous transfers, states mingling into each other’s national policy choices, which strains once-beneficial relations between European countries, it may not be such a great idea to continue with it. Those who believe that if only we do a few more transfers, everything may turn quiet, have been trying for five years. There will be no calm in a transfer union which lacks sufficient political unity. But perhaps the euro can survive, without transfers. Those who believe so, and I doubt that they're right, may now try Grexit to prove their point.

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knukles's picture

What I would do is take out my penis and slam it on the table to establish dominance.

Publicus's picture

Freedom and Justice for the people of europe.

knukles's picture

Syria has appealed for international assistance today, after a boatload of 500 Greeks arrived seeking a better life

A Lunatic's picture

I'm sure Assad (under the direction of Putin) has properly hosed them down with chemical agents and sent them on their way........

fleur de lis's picture

You really are a lunatic. Try to think for yourself instead of repeating what you hear from media dummies. 

0b1knob's picture

Greece has a GDP about the size of the state of Missouri's GDP.    The land area of Greece is about the same as Alabama.   Greece used to be important for some reason in European history that no one cares about any more.   Greece is figuratively and almost literally the turd shaped thing hanging out of Europe's butt.

What happens in case of Grexit?   Europe waves bye bye while muttering under their breath "Good riddance" while Greece goes whoosh! down the porcelain convenience. 

philipat's picture

Which part of "Default" does the author not undesrtand?

Wile-E-Coyote's picture

Hay arse ever been to Greece? No.

Well I have it is a lovely country with friendly people and great weather.

eforce's picture

Their restaurants lack ketchup, says it all for me.

KJWqonfo7's picture

After 15 years I returned to a little cove on the island of Rhodes that had the most beautiful beach I have ever seen.  I have been telling my wife and kids about this place for a long time and I was pretty excited to be back.  I walked out on the beach and found myself surrounded by lobster red Brits and Krauts.  

The place was a mess. It was no longer paradise.  

I chatted up a local guy who was renting paddle boats to tourist and asked him WHAT HAPPENED???!!!

His response "we made a mistake".  We were busy blaming the Americans for everything that was wrong.  We decided the way forward was the EUROPEAN Tourist.  Look at them, they come here with nothing but pocket change and a backpack.  What little money they have they spend on booze to stay drunk the entire trip.  Not the like Americans that showed up with money and a desire to see and do something different"

All this to say, Europeans don't eat Ketchup.


Kaervek's picture

Should've asked him if he rather sit on his paddle boats alone with no tourists around. He is lucky to live in a country where you can make easy money with tourists, there are worse occupations just look at eastern europe. Those poor people would kill to be able to sit on a beach all day and rent out boats to drunk tourists.

People will never stop complaining, fuck this world. Also Europeans do eat a fuckton of ketchup.

A Lunatic's picture

After all this time do I really need to /s anything I say.........??

Fukushima Fricassee's picture
Fukushima Fricassee (not verified) A Lunatic Jun 27, 2015 8:04 AM

You confused Reggies hose in Obama with a media lie.

Luc X. Ifer's picture

... and lots of nailgun & highrise accidents

Implied Violins's picture

Caitlyn matches; raises a vagina.

MsCreant's picture

He raised 3 young ladies, Kylie, Kendall, and Casey. 

CrimsonAvenger's picture

Can't tell you how many tables I've lost that way.

MsCreant's picture

On this site I am obligated to ask if the charts and graphs are okay. A financial porn website is like that.

grunk's picture

Angela Merkel and Christine LaGarde thank you for the advice.

Winston Churchill's picture

I would need a buffet table, but I know what you mean.

MsCreant's picture

Hi Knuckles,

Lots of folks playing with your penis on this thread.

But then again, you brought it up...

Question--Can a woman sexually harass a man on this website?

And is it okay?

And will we still be friends in the morning?


YHC-FTSE's picture

My guess is that your labia is longer than his penis.

(just kidding to the both of you! :))

MsCreant's picture

That could mean so many things...


knukles's picture

Hi MsCreant, sweets!
Yes, you can abuse anybody you want here and the emotionally stable amongst us (few) will enjoy the humor.
And then there are the "others".

So have at it and terrorize all the guys!  Hell, terrorize Everybody! 

Hope all's well

YHC-FTSE's picture

For awhile I thought I crossed the line with my sense of humour. Glad it's good. :)

Kaervek's picture

Question - how do you prove you are a woman on this website? Put Ms in your nickname or signature?

Anyways, in the morning we will certainly be more than friends, no matter the gender.

MsCreant's picture

No proof at all! I have few clues what your gender is, though I will guess male because men seem to be the ones who are interested in gender authenticity. 

There are women on here who post neutral, or even pose as men. I know who some of them are, you would be surprised. They don't want to be hassled, I think. It is a lot of work to conceal one's gender or be the opposite one when posting, so I have fun being a MsCreant. I don't have to be good, it is in the name, you have been put on notice.  

Glad to be friends!


Little Doll's picture

I just started 6 weeks ago and I've gotten 2 check for a total of $2,200...this is the best decision I made in a long time! "Thank you for giving me this extraordinary opportunity to make extra money from home. This extra cash has changed my life in so many ways, thank you!" www.earnmore9.com

TheEndIsNear's picture

And I would smash it with my gold and silver hammer!

bigkahuna's picture

loudly exclaim "bite my sirwally!!!"

Normalcy Bias's picture

What does the law matter anymore? Here in the US, they make up it's meaning as they go along! Easy peasy...

A Lunatic's picture

All I know for sure is too much grease will give you a horrible case of the shits......

Yen Cross's picture

 Everyone would buy gold and silver. ;-)

 The backwardation/hedging on the front end of the metals paper market would get "run over" as margin calls tore through stops, and demand for physical  skyrockets.

 The commodity based currencies will go parabolic as bond yields collapse from investors looking for a safe heaven trade. (usd/jpy will drop like a rock)

FlacoGee's picture

USD + US Treasuries will be the buy.

Commodities will be crushed next week...  Gold/Silver included.

Yen Cross's picture

 Wrong... It's different in that all the usd long positions are hedged. You go ahead and stack your FRN's though.

 The first place real money is going to run is "hard" commodities and assets.

The credit cogs are going to seize up and EVERYONE will be looking for liquidity. Do you think China or the ECB is in the position to provide that liquidity?  

I do... The ECB would love nothing more then to buy bonds exploding in yield to fullfull their mandate without breaking the yield cap.


MsCreant's picture


What about margin calls and sell offs, first? Everyone dumps everything they can sell, first, trying to settle their debts and stay in the game. Then bankruptcies. Deflation. Then everyone floods into what is real, only. 

Yen Cross's picture

 What part of the backwardated paper market part of my comment did you miss? The front end of all the commodity markets is hedged against "hypothetical" physical at least x3.

 As the short paper market unwinds they cover, "square up" their positions. They are buying back their position to close it with the counterparty.

MsCreant's picture

I am not inside your logic, honestly. Seems like too narrow a picture. I admit I am not an expert, not a trader. I may be wrong. I do get backwardation, but that is based on perceptions now, not what will be happening in a dynamic, panicked, frozen up credit situation. I will say more on that later.

I look at 2008. Over 30% drop before the big climb in Gold. Over 50% drop in silver. I know because I nailed the bottom of both and bought when it started to climb. Physical, paper is unacceptable.

Not that last time is like this time.

The thing is, with the CDS, if too much comes in too fast (so much of it is based on bets, rather than being real insurance to cover real risk, isn't it?), a lot of the accounting in lots of places is not going to "square up." They won't be able to sell enough stuff fast enough to settle all that to make others whole. Lots of folks trying to save themselves will dump real commodities to get $ to cover at first, because that is all anyone in the market "might" trust to buy when shit is falling apart. To say what I mean better, CDS and such are casino bets to clear with a house that may not be able to cover. Central bankers will intervene and pick winners and losers, like last time. Will folks have faith in the patch job? Or try to frontrun the patch job? Or revolt? 

In another version of things shit could be in court for years and in the meantime trade itself could come to a halt because no one trusts anyone, letters of credit are no good any more, etc. Now things get really interesting. Price discovery occurs only as you wake up from the hang over.

Looks to me like price abyss, first, for commodities, then inflation as all the money moves into only what is real. Hyperinflation possible with intervention. May already be in the cards without more intervention just because of the printing that has already happened and been stored in fake shit. 

Hope that made sense. I don't think anyone is hedged for this if it goes down full retard.

Tall Tom's picture

Nobody can be. It will be unlike anything the World has ever experienced as there will be no safe refuge.


Hyperinflations were restricted regionally and other markets were there where one internationally inclined could flee to safety.


China is on the brink of total Market Collapse.


The European Union is toast.


The Middle East is flooding World Markets with oil because there own financial houses are in disarray and they need the revenues.


Russia is a commodity based Economy and Commodities are declining presently.


Africa has always been a basket case and South American Bannana Republics are not that much better.


There is no safe refuge and the event is going GLOBAL. It will be a Global Systemic Collapse.

Piranhanoia's picture

The author forgets several useful words to describe the combatants, the odious debt,  definition of default of odious debt, who the spoilers really are, and the result from accepting any of the options he suggets.  Few would disagree the Greeks are again fighting nazi's headquarted in Bonn but acting from Brussels.  The spoil is the ponzi scheme payments and collapse. The spoilers are anyone else.   But there is one word to strike fear, nay, terror into the heart of messieur hunt and pecker that must not be named.   Iceland.    Poor Iceland aren't like Greece that have a huge tourist industry, gas fields off shore,  at the end of the silk road, or the gas pipeline. They don't even have Food, drink or the Med.

Ever been to Brussels?   

blackhand's picture

Isn't Grexit the only possible outcome (either now or later)?  What good does giving them another "credit card" to make payments and the 26 other "credit cards" they have do?

knukles's picture

In the section on "Default" he states; "If Greece would introduce a new currency, which then likely would lose value against the euro, it would still need to pay back its debt in euro, which woud appreciate in value as compared to the new Drachma, making this task even harder."

Excuse me, but if Greece defaults that's when they don't pay the lenders back regardless of the currency.

                        Somthinks wronk, Luchi!

Stained Class's picture

But wait! All Greeks having been taking their money out in EUROS with no capital controls in place.

When the new drachma drops like a rock, these Greeks will convert back into Drachmas and be millionaires! 

andrewp111's picture

You mean like Zimbabwian trillionaires? Oh wait. That currency is being demonetized.

shovelhead's picture

Yeah, that's a head scratcher.

He must not be inclined to consider the "Fuck off and die" default scenario.

There will be lawyers

bigkahuna's picture

The Grexit means Brussels/IMF can take all of that debt that they allowed Greece to accumulate and wipe their ass with it.

The Italian and Spanish versions will be soon to follow. Probably the French as well.

History lesson for tyrant banksters: The USSA (central banking system) only worked because the bankster tyrants of old found and porked a big virgin. Europe is no virgin. You try to pork her, she's gonna hit your ass hard.