I heard a story on NPR a few days ago about Greece having to sell state assets (to the tune of $70 billion dollars by 2015) in order to continue to receive IMF bailouts. Basically, the country may be selling it’s stake in a state-owned gas company, railway company, and airports (cite) as well as privatizing other state owned assets (cite).
Here’s my question: Why doesn’t just Greece abandon the Euro in favor of their own currency which is specific to the Greek economy? Why would a country sell its airport just to be apart of the Euro? I don’t get the upside of it.
Greece will still be bankrupt and probably in worse shape even if it leaves the Eurozone. By being part of Europe Greece’s bad fiscal situation becomes the problem of economically powerful countries like Germany. Since Greece and Germany both have the same currency, it is bad for Germany if a country like Greece goes belly up fiscally. For that reason Germany will work to help Greece get back on its feet.
Obviously the “pro-Greek” side of this discussion would say that Germany isn’t really helping Greece much at all and just making things worse. However the truth of the matter is it was just a year ago when Germany and the rest of the Eurozone did quite a lot to try and get Greece to stay solvent. What Germany is trying to do is require some degree of fiscal responsibility from the Greeks before they commit to continually bailing them out.
If Greece was totally outside the Eurozone they’d basically have gone bankrupt by now. States have gone bankrupt before and it isn’t the apocalypse it is sometimes made out to be. However it does have serious consequences on the economy of the country and its ability to operate going forward, it makes it extremely difficult to incur any debt for one. And it is very difficult to run a government if you can’t expect to cover shortfalls with government issued bonds. What happens is that the market will buy those bonds but only at very high interest rates, so it means that even if Greece declared bankruptcy and started issuing new bonds, they would have to be at extremely high rates or they would not be purchased in sufficient quantity for the Greek state to continue operations. While Greece can of course print money to continue operations unfortunately the interconnected nature of markets (especially commodities markets) mean that eventually that would cause extreme devastation to the people of Greece as their entire life’s worth was destroyed by hyperinflation.
Also, if Greece wants bailouts from the IMF there are certain things they would probably still have to do even if they weren’t using the Euro. So to get the bailouts from the IMF it doesn’t mean Greece might not have to do things it doesn’t want to do. By and large the IMF is European run in any case (the U.S. is the single largest shareholder but has out of tradition left management of the IMF to Europeans.)
Basically, the situation in Greece would normally result in a weak currency. The economy is shit and the government is in a lot of debt. The right move in this situation is to inflate your currency. This lowers wages and gives you a competitive advantage for exports. It also makes paying back debt relatively cheaper because you are paying them with less valuable money. The problem is that Greek debt and personal savings are denominated in Euros.
So let’s back up for a second. As I said earlier, shit economy and lots of debt = weak currency. However, Greece is only a small part of the Eurozone. So the strength of Germany et al is keeping the value of the Euro up. If Greece cuts that tie, there is nothing holding up the value of its currency. Thus you are looking a situation where Greece’s currency is invariably going to be weaker than the Euro going forward. What does this mean?
Let’s say that in 5 years, the new Greek currency is now worth 10% less against the Euro. That means Greece is now paying 10% more in real terms to service their debt. Obviously for a country that is already struggling to stay afloat, this is going to be a huge problem. Markets realize this, and thus will charge a premium to lend to Greece. This leads to a worse debt repayment outlook, and the vicious cycle starts over again. Now that Greece is paying higher interest rates, their ability to pay those loans back is diminished, and so investors are going to want a higher interest rate to compensate.
Basically, what it comes down to is if Greece can’t pay back their debt while in the Eurozone, they almost certainly won’t be able to do it outside the Eurozone. At least that will be the perception. That perception is going to start a stampede away from Greek debt, and basically guarantee a sovereign default.
Now say you are a Greek citizen, and you have a bunch of Euros in a Greek bank. If Greece says they are out of the Euro, you can be reasonably certain that the above scenario is going to play out. What are you going to do? Certainly not leave your Euros in a country’s banking system that is going down in flames. You are going to go get your Euros and put them somewhere safer. This means a run on Greek banks, and basically guaranteed bankruptcy for the entire banking sector. Bye bye banking sector = bye bye economy as consumers and business won’t be able to get loans.
Leaving the Euro = Shit hitting the fan. If it happens, it’s going to be messy and wreck Greece.
Yeah, but what creditor is going to willingly convert their loan from the Euro to the new Greek currency? They would all be better off forgiving some of the principle, or having an interest holiday.
Any new Greek currency would be worthless before it was printed. Nobody outside the country would accept or exchange it, except at ridiculous rates, which would just make the problem worse.
At least in the short term. But we have some problems. The first problem is that Greece is making things worse for itself in the long run. They get to dump many fo their problems on Germany (and the government can and has run up a bunch of self-righteous nonsense blaming Germany for not bailing out Greece enough in order to save its own skin). However, it also means the fundamental problems aren’t being fixed, which continues the crappy economic environment.
The second problem is that this makes the entire Eurozone less viable. Consider jsut how brief the currency union’s existence has been. if it’s already in this much trouble, just how long can it manage to survive? Believe me, a great many investors are considering that very question, and many Germans are asking if it’s even worth it. For complicated reasons I wo’t go into, Germany ahs de facto control over the Euro, to their benefit. But that control is coming at a huge cost in bailouts, which even Germany can’t afford indefinitely. If the PIIGS don’t get things patched up in due time…
Well, some things are not hard to figure. If it can’t go on, it won’t.