France’s President Francois Hollande and German Chancellor Angela Merkel’s spokesperson do it. Scores of financial pundits and members of Greece’s incumbent governing coalition do it. It’s not about falling in love, as the Cole Porter song went, but about brandishing a veiled threat.
The threat is that if the far-left opposition party SYRIZA gains power in the upcoming January 25 elections – as is likely – and chooses to antagonise other euro currency bloc member-countries over the question of austerity and debt servicing, it is highly probable that Greece will be pressed to voluntarily abandon the euro.
With the recent addition of Lithuania, the euro area numbers 19 European countries.
This is what “Grexit” means. The term originally was coined by economist Ebrahim Rahbari, when Greece started to have problems with paying back its debt, right after Dubai defaulted back in 2009 and international borrowing costs skyrocketed. Yes, it was the good old days when most of the western world’s nations had taken on great debt to bail out their banks which had crashed after the 2008 financial crisis.
Show me the money
Is this a real threat, a concerted attempt to scare Greek voters into voting a particular way? Or simply setting the stage for future negotiations on Greece’s quarter of a trillion US dollar loan programme?
The simple truth is that under current treaties Greece cannot be kicked out of the euro. As the body representing the European Union’s administrative bureaucracy, the European Commission, recently noted, ‘euro membership is irrevocable’.
After a series of alarmist reports suggesting Germany had no qualms about a possible “Grexit”, there were new reports calling for just the opposite and the international business press happily chimed in.
The simple truth is that under current treaties, Greece cannot be kicked out of the euro. As the body representing the European Union’s administrative bureaucracy, the European Commission, recently noted, “euro membership is irrevocable“. So why the drama?
Greece these last five years has borrowed about $231.6 billion from other euro area countries. Some $63 billion are bilateral loans made through a 2010 loan agreement which came to be known as the notorious “Mnimonio” (Memorandum of Understanding).
Greece received a further $168.7 billion through the 2012 European Financial Stability Facility (EFSF) loan agreement, where other euro area member-states are the guarantors.
It should be noted that Greece also has borrowed about $33.3 billion from the International Monetary Fund. However, the IMF benefits from institutional priority over all other creditors.
Greece has signed agreements for a $287 billion total loan package with its EU and IMF creditors but a significant tranche has yet to be disbursed.
So if Greece defaults on both its euro-area loan programmes, Germany stands to lose around $67 billion, France $50.4 billion, Italy $44.3 billion, Spain $29.4 billion, the Netherlands $14.1 billion and Austria $6.9 billion.
The “Grexit bill” further would increase after aggregating the losses on Greek bonds held by the ECB and other Eurosystem countries’ central banks. There is also the matter of the “hole” that would open in the ECB’s balance sheet if Greece withdrew from the European Monetary Union, i.e. the euro.
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While public attention is focused on the at least $66.8 billion Germany potentially would lose in case of “Grexit”, the potential loss for the rest of the euro area could reach $164.4 billion, something which has not been stressed enough.
Default and defiance
And there is the question of why Greece was bailed out in the first place. Philippe Legrain, a former adviser to the European Commission president asserts the bail outs were about saving German and French banks.
Of course, there are other ways of piling pressure on Greece, given its shoddy finances. There is a $54 billion gap between deposits and loans handled by Greek banks.
Greek banks rely on the ECB for this liquidity. And the ECB has made it clear that it will reconsider its options if Greece fails to adhere by its agreements. This threat is all too real, as Cyprus discovered in 2013.
Theoretically, euro area countries could recover the funds they lent to Greece under the draconian terms of current loan agreements but in practice the recovery process would take many years to resolve.
If Greece defies its euro area creditors, some argue it will have no choice but to pick the “Grexit” path which in turn will lead to even tougher fiscal austerity and unprecedented shortages in imported goods and raw materials. The country also would experience a collapse in investments, further exacerbating the situation after six years of painful recession.
Others argue that by leaving the euro, reverting to its own currency and charting its own monetary policy, Greece quickly will recover. But even for proponents of this scenario, the recovery will take place in an unfriendly international environment.
Menelaos Tzafalias is a freelance journalist and producer based in Athens, Greece. He has worked as an associate producer on the documentary “Palikari: Louis Tikas and the Ludlow Massacre”, a story about migrants and labour relations in early 20th century America.
Thanassis Koukakis is a financial journalist, columnist and analyst based in Athens, Greece.