GREEK EXIT - NO DIVORCE IS DEVOID OF PAIN

By Ruma Dubey

The most closely watched stock in Europe right now? De La Rue. This is a British printing company, listed on the London Stock exchange and is the world’s largest commercial currency printer.  The company designs and produces more than 150 national currencies around the world.

This stock price of this company has soared over 13% since the past one month. Why? Because if Greece decides to exit the Eurozone, it will need to print its own currency, the Drachma, and they will most likely head to De La Rue. So there is any geopolitical change, this is one company which is expected to emerge the biggest beneficiary. Now this is how the market always views thing – very capitalist with no emotions, always looking for winners, even if they look like scavengers.

De La Rue might be the only biggest gainer for now if Greece decides to exit. But its exit is bound to be messy. The first big question dogging everyone is as to how ill Greece leave, what is the process when a country wants to quit the EU? It is not like as though one check’s out of the hotel after the stay.

Many say that iIf and when Greece exits, it would not come as a ‘breaking news’ sensational announcement where the leader of the country would just announce its exit. The ‘breaking news’ announcement was that Greece is in deep trouble and its political turmoil of last week. Now going ahead, with everyone suspecting its exit, it might just sit tight, will not repay its debt and thus by becoming a defaulter, will force the other members of the EU to make a decision – whether or not they want a defaulting country in the EU.

There is another school of thought which says that the Greek Govt might confer, set an internal date for the exit and typically, on a Friday evening, after all markets are closed, will announce the date of its exit. But this news has to be top secret as it could lead to an exodus of the Euro from Greece banks and that could lead to a virtual collapse. There is already news of banks in Greece seeing huge withdrawals but there are no serpentine queues yet outside banks for withdrawal. Money fleeing the country is essentially via bank and wire transfers of HNIs and FIIs. The common man on the street is yet to panic to that extent. Rather, they do not really have a choice right now.

So then how do they ‘oust’ this defaulting country?  When the Euro was created in 1992, no mechanism was put in place for exit from EU.  In 2007, a new treaty was added to allow the option of exiting the EU. Thus to exit from Euro, it will have to exit from EU as per the treaty. There is no provision in the EU treaties for exiting the euro zone without also dropping out of the broader 27-country bloc.  But this will again mean an exit from the EU and not the Eurozone as there is simply no law in place to do that.  Policy makers in EU are neither in a hurry to put in place the process of exit, nor do they want to make it easy as they fear it could lead to an exodus with many more beleaguered nations wanting to opt out.

But if Greece plans an exit, what happens to the currency? The Euro will have to go and the drachma will have to printed and that could take as much as four months. And people with Euro’s will be given a conversion rate, like one drachma for every two Euro held or something similar. Once the conversion rate is fixed, the exchange rate will be allowed to dictate the rate of drachma, which could crash immediately.

And if this is the kind of upheaval we are looking at, banks would also need to be protected to ensure they do not crumble under withdrawal pressures. Capital controls, recapitalization and nationalization of the banks will most likely come in. This exit just as not easy, will also not be cheap. The IMF which has presented a paper on the exit of Greece stated that it will be extremely expensive, pegging it at around 1 trillion Euro’s. And when it comes to issues about the Greek debt, it will be the most contentious and sticky part. The domestic debt could get converted into the drachma but external debt, money repayable to bondholders and more importantly, the money owed by Greece to the ECB would all need restructuring and renegotiations. And after the exit, Greece would find it nearly impossible to get money. The only positive is that Greece will become extremely cheap for the outsiders. Though importing fuel and other necessities might become very expensive, exports would be cheap and for the German’ Greece might emerge as the best, cheapest holiday destination for vacationing. Companies with JVs with Greek companies might also be having sleepless nights.

All in all, the exit will be bad news for the Greek and all around. But the bigger worry is that if Greek exits, will others like Portugal, Italy and others also line up for an exit? Greece is too small a country and economy to affect the entire EU but the possible exodus of others is probably the biggest fear. The beating down of confidence would be the real contagion. 

For India, being globally linked up, this will cause a lot of pain. The EU crisis will take longer to dissipate and given our own macroeconomic issues, it will only keep the economy further depressed. Yes, for now, the dark clouds loom large over the entire economic world. Best to wait it out.

The ruins of Parthenon in Greece look real, very real now.