Greek exit talk edges euro towards tipping point

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The FINANCIAL — Greece could be weeks from a euro exit crunch as an electoral revolt against EU austerity and a run on banks nudges the debt-laden eurozone towards a long-predicted tipping point.


Politicians tired of paying an electoral price for multiple rescues have begun talking down the impact of a break-up despite vast loans already thrown at recession-ravaged Athens, yet investors and economists warn the wider costs may be far more than imagined.

"It is something that would be extremely expensive and would pose great risks — but it is part of options that we must technically consider," said International Monetary Fund managing director Christine Lagarde.

In a widely-reported TV interview, the man who represented banks in negotiations over a write-down of their Greek debt, Charles Dallara, said the consequences of 'Grexit' would lie "somewhere between catastrophic and Armageddon".

"The end of the euro in its current form is a certainty," said Doug McWilliams of the English-based Centre for Economics and Business Research, who claims the cost of Greece restoring its drachma currency "might be nearer to 1.0 trillion dollars if unplanned".

Two years after a first 110-billion-euro EU-IMF bailout and two months after a second 237-billion-euro fix, eurozone partners have let it be known they are not in the mood to be held hostage.

Despite three quarters of Greeks wanting to remain in the euro, a May 6 vote that returned a majority for anti-austerity or anti-European Union parties failed to deliver a workable coalition, and so voters return to the ballot box on June 17.

For German Foreign Minister Guido Westerwelle, the Greek people are voting on "Greece's future in Europe and the euro", and "what has been agreed must stand".

But that was agreed in March and this is May. Accelerating deposit withdrawals — 800 million euros between May 6 and May 14 according to AFP sources — raise an altogether scarier prospect.

"With news of a creeping bank run in Greece, it has become obvious that the period up to the Greek elections will be volatile and nervous," said economists from Amsterdam-based ING.

Warning that "hardly anything" can be done about 'Grexit' speculation, they reckon that fresh European Central Bank (ECB) intervention will be required to bring some calm to the markets.

Nearly 50 billion euros are already earmarked from the eurozone's firewalls to recapitalise Greek banks — with 18 billion expected by the time EU leaders meet for a Brussels summit on Wednesday.

Greece accounts for less than 2.5 percent of the eurozone's 9.0-trillion-euro economy, but the precise effect of an exit is difficult to predict.

Big companies yanking money out of Greece and moving to safe havens may be just the start of contagion, with some economists predicting a dam breaking in Athens and a flood subsequently engulfing Cyprus, Portugal and, most worrying, Spain.

The European Commission's top trade official, Karel De Gucht, told a Flemish newspaper that ECB and Commission officials "are studying emergency scenarios where Greece cannot manage".

The argument for "Grexit" centres on Athens starting over with a cheaper currency, leaving wealthier, more closely-aligned northern eurozone states in a new, tighter hard core.

But economists say there is no evidence of a disciplined culture in Greece that would enact the cuts and reforms required whether or not it leaves the eurozone.

Also, the creation of a cut-price export competitor from within sits uneasily with the single market, as Austrian Finance Minister Maria Fekter suggested when saying eurozone exit would mean European Union exit — with the attendant loss of farm and infrastructure billions from Brussels every year.

London-based UBS Investment Research suggests a 60-billion-euro bill for fresh restructuring even if Greece stays, and a minimum loss of 225 billion under an exit with "the biggest risk" being "considerably more painful" bank runs elsewhere in Europe.

Already, the Greek banking system has lost around one third of its value since the sovereign debt crisis exploded: deposits falling from 237.53 billion end-December 2009 to 165.35 billion at end-March.

Economists at Deka Bank have estimated the total cost to German taxpayers at more than 100 billion euros, with Paris pegging its bill at 50 billion euros.

According to EUbusiness, this all assumes that Greece does not repay EU loans.

Amid widespread debate abut the mechanics of an exit, some experts suggest a halfway-house where Greece issues "proxy" drachmas.

Full changeover would mean an abrupt correction in exchanges with the outside world — economists predicting that Greece would devalue by 40-50 percent (citing Iceland's financial collapse in 2009).

With devaluation, exploding external debt and default would also come the suspension of capital flows, partial bank shutdowns and political intervention to set prices for essentials.

Holidays might be half as expensive for non-Greeks, but the price of petrol could double.

Europe's financial re-engineering, though, would be just beginning — with this week's Economist magazine identifying ever-closer fiscal integration for those that remain in the eurozone, and ultimately sovereign debt mutualisation, as the only lasting answer.



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