Greek Drama: Unfolding of Drachma

In fact, ‘Grexit’ will be eventually construed bullish for the entire Euro region, as market participants will realise that departure of Greece implies no more bailout and no more debt burden. Forget repayment of loans, the stressed nation was not even able to service its debt. Time is of credence that bailout money has failed to solve the structural woes, unless Greece treads on the path of serious financial prudence, which eventually entails cut in fiscal spending.

Jun 30, 2015 03:06 IST IIFL Hitesh Jain |

Greece national flag
Drachma might be a forgotten name, but Greece’s national currency (pre-2001 period) stands a good chance of making a comeback given that the Greek’s incumbent regime is stuck between the devil and the deep blue sea. Bailout negotiations have hit the deadlock, with creditors rejecting the proposal forwarded by Athens. The proposal excluded core issues like pension/wage cuts and flexible job laws. There are objections about key elements in the Greek proposals. IMF has categorically voiced concerns that Athens is predominantly banking on collecting taxes rather than cut in spends. There is widespread opposition to the Greek demand for debt relief in the form of substantial haircuts on overall loan amounts. ECB has already decided to freeze its emergency lending lifeline to the country’s banks. Effectively, Greek banks will be deprived of the much needed liquidity, which has compelled the government to initiate action to avert the collapse of the domestic financial system. In the latest, Greece has decided to shut the banks till July 6th and impose capital controls.
 
Meanwhile, Athens has decided to call a referendum on the decision for bringing cuts in government spending. To win a vote on spending cuts will be an onerous task for Tsipras-led Syriza party. Earlier, PM Alex Tsipras had promised no cuts in government wages and jobs. The writing is on the wall; Greece will not meet the IMF payment deadline and end up exiting the Euro zone what is popularly termed as Grexit.
 
On the repercussions perspective, although global equities and bonds have moved lower in response to the Greek turmoil, we infer that broader markets will learn to live with it. Recent slump in the equity markets is symptomatic of the phenomenon that people pay homage to the deceased, regardless of the fact whether they love or hate the one who has passed away. To an extent, markets have already priced in the worst, which can be manifested by the fact that euro has already descended sharply from the levels of 1.38 during early 2014. There is a growing perception that damage from a potential Greek default will be ring-fenced to global lending institutions like IMF. Private creditors have already taken a massive haircut on their loans to Greece during 2012, so not much pain is in the offing. Greek disaster also does not have the potential to spell doomsday for the global economy, considering the fact that Greece GDP contributes less than 3% to the Euro region.
 
In fact, ‘Grexit’ will be eventually construed bullish for the entire Euro region, as market participants will realise that departure of Greece implies no more bailout and no more debt burden. Forget repayment of loans, the stressed nation was not even able to service its debt. Time is of credence that bailout money has failed to solve the structural woes, unless Greece treads on the path of serious financial prudence, which eventually entails cut in fiscal spending.
 
As far as the impact of divorce on Athens is concerned, Greeks have to bite the bullet. End of the liaison with the Europeans will compel Greece to resort to Drachma. The domestic unit may not offer any respite initially, as indisputably it will tumble to abysmal lows against various currencies taking into account the dismal fiscal health. However, there is a glimmer of hope for the debt-laden nation. Weaker currency will make exports competitive; tourism will get the much needed shot in the arm. As a result, the country will eventually move towards the path of restructuring the budgetary balance. Even though, the government may not be determined on downsizing the expenditure part, there is a wide scope for bolstering the state revenues and exchequer.
 
Needless to mention, the envisaged process will be a painful one and involve a long gestation period. Considering the scheme of things, Greece has to embark on the road less travelled, if the policymakers intend to restore the economy in shape as well as the pride of the nation. There is no substitute for fiscal discipline; it has to be either enforced by someone or self-induced. Charity degrades dignity and never begets real prosperity. Greeks cannot afford to survive on the dough provided by its European partners. They need to determine their own existence. For this, there is no better time than now.  

The author is Senior Analyst at IIFL


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