Greece Default, New Crisis Essential For Europe’s Economic Recovery – Analysis

By Vlad Grinkevich

Greece is on the verge of bankruptcy. This week, European Commission experts will arrive in Greece to work with its government on a new set of to help the country meet the criteria for receiving another bailout from the European Financial Stability Facility (EFSF) and the International Monetary Fund (IMF). But there is little hope that financial aid can save Greece. The German government is already analyzing scenarios of a Greek default, which many experts consider inevitable. Meanwhile, Christian Lindner, the general secretary of the Free Democratic Party of Germany (FDP), said on Sept. 12 that he does not rule out Greece’s withdrawal from the eurozone.

Pay-your-own-way

Just six months ago, any talk about an EU member quitting the eurozone was taboo for major European officials. To the contrary, EU representatives emphasized on every occasion that the euro area’s unity will be preserved at all costs and the EU will help countries undergoing difficulties.

And so, the EU is helping a problem-ridden Greece. Last May, the country received a 110 billion euro loan from the EFSF and the IMF in exchange for an obligation to carry out tough reforms on spending cuts and tax increases.

However, for now, this help has failed to produce the desired effects. Economists almost unanimously concur that there are no potential drivers for economic growth in Greece.

Yevgeny Gavrilenkov, the managing director of Troika Dialog, said Greece will not be able to become more competitive as long as it remains in the eurozone.

“Calculations show that the debt, high costs and excessive employment will hardly allow Greece to demonstrate any economic growth,” he said.

Under the circumstances, many economists believe that Greece’s exit from the euro would be a logical step benefiting both Greece and the advanced European economies, primarily Germany, which is compelled to help outsiders.

Commenting on Greece’s potential withdrawal from the eurozone, Kirill Tremasov, the head of the Bank of Moscow Analytical Department said the Greeks themselves will be the first to benefit from this step.

“Their troubled economy needs cheap currency,” he said. “The return of the drachma and devaluation would trigger a short-term shock, but would give local companies a competitive advantage.”

Economy versus politics

However, any EU member’s withdrawal from the eurozone is fraught with serious problems. A relevant mechanism simply does not exist. What about European companies and banks that own euro-denominated Greek bonds? Yesterday, the yield on two-year Greek bonds surged to 62.19 percent, which means they are unlikely to be paid for.

Tremasov thinks the initial losses that are inevitable in the case of Greece’s return to its national currency or default on debt could run up to 1 trillion euro. This is a handsome sum, but leading EU economies can cope with such a figure. For reference: the EFSF has a total of 750 billion euro.

European officials are already thinking of how to help their financial institutions. Last Friday, the German government was reportedly drafting an urgent bailout plan for banks in the event of Greece’s default.

On this score, Gavrilenkov said this is a “soluble problem.”

“Maybe the state will have to buy and maintain a stake in banks with distressed Greek securities for a while,” he said. “UK and U.S. experience shows that this measure is relatively harmless for the market.”

Apart from technical problems, Greece’s withdrawal from the eurozone may create a dangerous precedent.

Igor Nikolayev, the director of the FBK Strategic Analysis Department, said Greece is unlikely to be the only case of default in the EU.

“Italy, Portugal, Spain and Ireland may follow suit,” he said. “Greece’s withdrawal from the eurozone may kill it by triggering a domino effect.”

He added that “an end to the eurozone would mean the failure of the policy pursued over the past two decades.”

“I do not think the current political elites will go for this,” he said.

Nikolayev stressed that politicians favoring disintegration are unlikely to come to power in the near future. This suggests the conclusion that Greece will remain in the eurozone contrary to economic logic.

Gavrilenkov underscored that the large-scale sale of Greek assets to foreign investors, for instance, from China, may be an alternative to Greece’s exit from the euro. China’s financial agencies have shown an interest in the problematic countries of the Old World.

According to the Financial Times, China Investment Corporation, one of the world’s largest sovereign wealth funds, has been negotiating the purchase of a large package of Italian debts with the Italian government since August.

However, Gavrilenkov does not believe the sale of the debts will help Greece, as it will have to sell everything, including its beaches, in the hope for economic recovery.

“But the Greek government is unlikely to do this,” he said. “The Greek public is staging demonstrations and protests against privatization, cuts in spending and the aggravation of social issues.”

Heaven-sent crisis

Greece’s bankruptcy is virtually a fait accompli. The country is already in the process of default.

“After the yield on one-year Greek bonds went above 60 percent a week and a half ago, the market has acknowledged that a default has already taken place,” Nikolayev said. “The problem is that the Greek default will not produce a positive effect. Greeks do not have their own currency that they could devalue, thereby giving a competitive advantage to their companies.”

The Greek default is fraught with upheavals for the global economy, and the domino effect may cause economic collapse in Italy, Portugal, Spain and Ireland, which would trigger a new global downturn.

“The Greek economy has collapsed, but if Italian and Spanish bonds come under threat, the consequences could be disastrous,” Tremasov said. “This is a catastrophic scenario and I do not think the EU leaders will allow it to happen.”

Yesterday’s fever on stock exchanges across the world only confirms his belief. New rumors about Greece’s potential default led to a sharp decline in the European, Russian and Asian stock market indexes. The apprehensions of a European economic slowdown reduced oil prices. The Russian RTS index dropped by over 5 percent on Monday, but partially made up for the loss by the end of the day. After the trading session, the decline stood at 3.6 percent.

Tremasov thinks that out of fear for the future of the EU economy its officials will delay Greece’s default until they can execute it with minimal losses. The keyword here is ‘delay’ because there seems to be no solution to the Greek problem. However, a delay in bankruptcy will just lead to European economic problems piling up.

Nikolayev believes the default of distressed European economies and a new wave of the global financial crisis is a radical, but inevitable measure for eliminating current economic disproportions.

“It is better not to put things off until the very last moment, but rather to launch a new wave, having decided how to minimize the consequences of the crisis,” he concluded.

The views expressed in this article are the author’s and may not necessarily represent those of RIA Novosti.