Bloomberg News

Greek Euro-Exit Moonscape Result May Threaten Drachma Choice

June 05, 2012

Greek Euro-Exit Moonscape Result May Threaten Drachma

A passenger waits on a metro train platform in Athens. Photographer: Kostas Tsironis/Bloomberg

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 & Co., wrote in a May 18 note to clients. In a May 29 report, National Bank of Greece said an exit would deepen the recession by about 22 percent in a year at stable prices.

‘Larger Community’

“Greeks are preparing for the worst,” Elpida Hatzitheodorou, an antique dealer several hundred yards from the ancient Acropolis in Athens, said in an interview. “We have to stay in the euro. I feel safer as part of a larger community.”

The 50-year-old Hatzitheodorou, whose shop is bursting with silver knickknacks, lace trimmings and traditional Greek cabinets, said she bought gold jewelry to diversify savings after sales plummeted as much as 80 percent from their peak.

Because a devalued currency makes imports more expensive, industries including tourism, energy and health care would struggle initially to acquire goods from abroad, said Costas Lapavitsas, a London-based economics professor and author of a book called “Crisis in the Eurozone.” He recommends a euro exit and debt default to revive Greek industrial production.

Energy Imports

“There would be problems in buying oil, pharmaceuticals and certain food,” Lapavitsas said by phone. “The government would have to administer what’s imported and manage the distribution of supplies to where they’re needed most.”

With fewer resources, tourism, Greece’s biggest industry at around 16 percent of GDP, would risk reverting to a “rooms-to- let” strategy focused on low-cost travelers rather than building on the past decade’s improvement in infrastructure and services, said Aggelos Tsakanikas, head of research at the Foundation for Economic and Industrial Research in Athens.

Such a shift would mean a “significant decrease” in overall spending by tourists in Greece, even if their numbers rose, he said.

And while a return to the drachma might make Greek real estate and other asset prices more attractive to foreign investors, they, like holiday travelers, would be deterred by any public disorder, Tsakanikas said.

Unrest Forecast

“The main question is whether tourists and investors would be willing to visit and invest in a country if there is social unrest of any kind,” he said. “It would be a long period before stability is restored to the country.”

Three people were killed in Athens after being trapped in a burning bank during riots in May 2010 when the euro area and IMF were wrapping up an initial bailout. This past February, as Greece was pushing through extra budget cuts for a second aid package, rioters in the capital set fire to as many as 45 buildings and attacked 170 businesses.

Economists including Kai Carstensen at Germany’s Ifo institute are more sanguine about a Greek exit from the euro. In a study in April, they concluded that this route -- coupled with a devaluation of any new currency -- would be a feasible alternative to the current strategy of fiscal austerity and internal devaluation through wage and price cuts.

“Experience suggests that, after external devaluations, countries have recovered much faster,” wrote Carstensen and six of his colleagues at the Munich-based Ifo. They cited as evidence Argentina’s debt and currency crisis in 2002, Thailand’s devaluation of the baht in 1997 and Italy’s temporary exit in 1992 from a European exchange-rate system that led to the euro’s creation in 1999.

Slimming Deficit

Greece has narrowed its budget deficit from more than 15 percent of GDP in 2009 -- more than five times the European Union limit -- to 9.1 percent last year. The country cut the minimum wage 22 percent this year.

The hardship has helped Syriza challenge four decades of Greek political dominance by New Democracy and the socialist Pasok. Both those parties, whose support collapsed on May 6 after they united six months earlier to back further fiscal tightening, pursued high-spending policies for decades after the end of a Greek military dictatorship in 1974.

Recent polls show Syriza running neck-and-neck with New Democracy before the parliamentary elections, with Pasok third.

Jumping Backward

Guy Verhofstadt, who was Belgian prime minister when Greece joined the euro in 2001, said staying a member would encourage the overhaul of a system characterized by corruption, closed markets and a bloated state that employs almost one in five workers. A return to the drachma would reinforce political traditions, he said.

“You jump backwards in time,” Verhofstadt, now leader of the pro-business Liberal group in the European Parliament, said by phone in Brussels.

Intelli’s Tziorkas, while calling the business mood in Greece “bad” after two years of austerity, said the nation needs to pursue budget cuts agreed to with euro countries and the IMF because doing so would keep aid flowing and ultimately strengthen the Greek economy.

Intelli, with about 120 employees and 6 million euros in revenue, has offset some of the impact through growth abroad in such countries as Cyprus, Romania, Turkey and Egypt.

Anticipating the possibility of a return to the drachma, the company hasn’t only conducted preliminary inquiries into what it would take to transfer the headquarters abroad but also looked into keeping cash reserves outside Greece, he said.

“We are living a situation in which we can’t predict the future,” Tziorkas said. “The only thing to do is a Plan B.”

To contact the reporters on this story: Jonathan Stearns in Brussels at jstearns2@bloomberg.net; Elisa Martinuzzi in Milan at emartinuzzi@bloomberg.net

To contact the editors responsible for this story: James Hertling at jhertling@bloomberg.net; Edward Evans at eevans3@bloomberg.net


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