THE

THREAT OF A GREEK EXIT

The economic crisis looming large in Greece and the possibility of a Greek exit
from the euro zone, referred to as grexit makes a good topic for discussion and
review at present. The huge government deficit has begun to reflect in the rising
bond yields(to 22.9% from 20.5% at the end of April) and the plunge of the stock
market; which may well trigger bank runs in the future if citizens feel their
deposits might be devalued. This is a problem which requires urgent attention
from the high priests of European orthodoxy.
The tough austerity measures specified in the second bailout package may all
but stimulate growth which is required for banks to remain healthy so that
repayment of debts becomes possible. It has been received with protests at
home in Greece over wage cuts and the political stalemate has not made things
much better with the Radical Left wing party of Greek politics, if they come to
power, having a high proclivity towards an exit rather than adhering to stringent
austerity and sovereignty of Germany and the like.
A return to the drachma, if it happens, has serious economic implications for
Greece and euro zone with high risks of hyperinflation and losing of a singlemarket access for the nation not the least of them. Not to mention European
taxpayers standing a chance of losing their money when there is no possibility of
repayment. Also there is a chance of liquidation of many business firms both
home and abroad. Then there is a wider threat of the contagion spreading to
weak economies like Ireland and Portugal which may follow suit. All this can be
averted by prudent measures which are being suggested by experts to be taken
sooner than later.
One is the ratification by Germany and some countries, of the permanent rescue
facility, European Stability Mechanism, due in July, which along with the
European Financial Stability Fund would increase total lending capacity to $500
billion to provide a fiscal stimulus for Greece. Then there is a proposal for federal
deposit insurance and regulation, bank supervision and recapitalisation which
would regain investor confidence. Thirdly, there is the solution for mutualisation
of limited amount of debts over a limited period of time by provision of narrower
Eurobonds by euro zone economies with over 60% of public debts to GDP.
These challenges that lie ahead in keeping the euro zone intact and are indeed
tougher than they seem. While Greece is already on a path of bridging deficits,
the stop of money infusion would cripple the economy and push it towards the
edge of a cliff .The question is whether the Germans, Austrians and Dutch feel
solidarity with Greece to pay up not only to keep the nation afloat but also in the
bigger interests of the euro zone to prevent any immediate repercussions arising
from a possible grexit in the countries of Ireland and Portugal and also in the
reeling economies of Spain and Italy.