Nobel laureate sees Grexit as ‘moonscape scenario’

By Jonathan Stearns and Elisa Martinuzzi

Business in Greece can hardly get worse for Pavlos Tziorkas?s technology-consulting firm as it battles a credit freeze in the fifth year of recession. That is, he says, unless his country were to leave the euro.

?If we go out of the euro, we will have an unstable environment in Greece, I am sure of that,? Tziorkas said by phone from Intelli Solutions SA?s office in Athens, near the city center, where public protests and clashes with police have been commonplace since the debt crisis erupted two years ago. Dropping the euro might prompt the company to relocate from Greece, he said.

As Greece gears up for its second election in as many months, companies and citizens are grappling with the possibility the nation will be forced to return to the drachma, 11 years after swapping it for a German-designed single currency meant to be an irrevocable step in European economic integration.

A post-euro Greece, a country whose economy is about the size of the U.S. state of Maryland, may face defunct banks, collapsing businesses, skyrocketing import prices, soaring national debt, food rationing and even violent demonstrations, according to a dozen economists, analysts and professors.

Even the normal reward of a currency devaluation, cheaper exports, would help little in a country where manufacturing accounts for only 10 percent of gross domestic product.

No Other Option?

?A moonscape scenario, one where everything that is mobile leaves, is certainly one you can anticipate,? Michael Spence, a Nobel laureate in economics and professor at New York University?s Stern School of Business, said in an interview in Milan. ?The short-term scenario is one of chaos.?

The June 17 Greek vote follows an inconclusive May 6 election that catapulted Syriza, a party that favors reneging on budget-cutting accords tied to 240 billion euros ($299 billion) in international aid, into second place. A Greek government that won?t stick to the bailout terms may fail to qualify for quarterly emergency loans from the euro area and the International Monetary Fund and run out of cash, leaving no option except to introduce its own currency.

The risks have prompted Intelli, whose clients include Greek units of French bank Societe Generale SA (GLE) and of Dutch financial- services company ING Groep NV (INGA), to consider moving its headquarters to another country in the 17-nation euro. Possibilities include Luxembourg or Cyprus, said Tziorkas, the 43-year-old general manager.

Not Argentina

While a reborn drachma probably would boost the export and tourism industries, Greece may not be in a position to follow Argentina?s example a decade ago of defaulting and devaluing its way back to growth. Even after completing the world?s biggest writedown of privately held debt as part of an extension of European and IMF aid through 2014, Greece may fail to make future payments without outside help.

What?s certain, say bankers, economists and analysts, is that any exit from the single European currency would create a major financial disruption.

?There would be a run on deposits and banks would only be left with transactional money,? Guillermo Nielsen, who became finance secretary in 2002, months after Argentina defaulted on $95 billion of debt, said by phone from Buenos Aires. ?The result would be more income disparity, between those who have access to cash and those who don?t. It would become a third- world country.”

A euro-area exit without the support of fellow euro countries and the European Central Bank would force Greece to take direct charge of the nation?s lenders, Credit Suisse Group AG analysts say.

Depleting Deposits

A 75 billion-euro, or 30 percent, deposit depletion over the past two-and-a-half years and writedowns on Greece?s debt have left domestic banks needing 50 billion euros in capital.

Greek banks would lose access to ECB funds in the event of an exit, bringing economic activity to a standstill, Credit Suisse said in a May 11 note. Companies, the government and individuals may have to resort to bartering goods and services while a new currency is printed.

The country?s four biggest lenders — National Bank of Greece SA, EFG Eurobank Ergasias SA (EUROB), Alpha Bank SA (ALPHA) and Piraeus Bank SA (TPEIR) — got a first injection of capital from the euro area?s rescue fund in late May, letting them return to ECB financing, ECB President Mario Draghi said on May 31. Earlier, the lenders were forced to rely on the Greek central bank?s emergency assistance after being suspended from direct ECB funding.

Denominating Debt

Beyond the cash crunch, Greek authorities would need to decide which euro-denominated debt to foreign creditors should be honored by the state and banks. The rest would be redenominated into the new currency, a process that could lead to years of legal battles.

Seven-year-old Intelli Solutions would find its debt to foreign software suppliers ?multiplied? with the re- introduction of the drachma, Tziorkas said.

Economically, a recession more severe than the 13 percent shrinkage over the past three years could envelop the country, where unemployment is at a record of almost 22 percent.

A Greek exit would shrink GDP by as many as 10 percentage points more than if Greece were to remain in the euro, making the slump comparable to the Great Depression in the U.S., David Mackie, London-based chief European economist at JPMorgan Chase

Subscribe to our Newsletters

Enter your information below to receive our weekly newsletters with the latest insights, opinion pieces and current events straight to your inbox.

By signing up you are agreeing to our Terms of Service and Privacy Policy.