Greece : default ahead ?

Note kindly translated by Anne-Marie de Grazia

Could it be that the Eurogroup is getting used to the idea of the possibility of a Greek default? Information coming from Reuters[1] seems to confirm this. A meeting of experts which was held at Bratislava Thursday June 11th supposedly evoked for the first time the possibility that, lacking an agreement, Greece may default. These information also confirms that even if some governments have been working for several months over this hypothesis, it’s the first time that the Eurogroup has broached the question.


The consequences of a default.

A Greek default would imply not only a radical devaluating of the Greek debts held bilaterally by various States of the Eurozone or held by the MES, but also the impossibility to use these titles as collateral within the mechanism of emergency liquidity assistance (ELA) created by the European Central Bank. The default would entail the immediate suspension of the ELA and would force the Greek government to use monetary instruments constituting a proto-currency and which, within weeks, would become an alternative currency. Let’s note that, in this scenario, the Greek government is compelled to create these instruments and that it can claim that it is doing so under duress, imposed by the attitude of the ECB. Openly, the Greek government could continue to claim that it wants to stay within the Eurozone, while setting afoot the process which will in fact result in re-creating the Drachma. The Greek government could continue to claim that it did not want this default and this exit from the Euro, while preparing to cash in on the benefits from these events. And these benefits are far more considerable than what is being thought and said.

The benefits of a default.

The consequences of a default would be distinctly greater for the partners of Greece than for Greece itself. Considerable sums have left Greece since February. It is estimated at present that over 30 billion euros have left Greece since February, owned by Greek players, landing on foreign bank accounts. Once the Drachma is created, these sums would return to Greece and, given the depreciation of the Drachma relatively to the Euro, the players (businesses and households) who had brought these liquidities out of the country, would gain in purchasing power in Greece. One can expect that the Greek government could then establish a control on exchange and skim off a small tax (5%) on these returns, which would allow households and businesses to legalize part of their assets, while giving the Greek government additional financial means to compensate that part of the population which has not been able to bring liquidities out of the country. This « return » of the money held abroad might well be the equivalent of what the Greek government asked of the European Union, that is, an investment plan. Taking into account the amelioration in the competitiveness of Greek exports because of the depreciation of the Drachma, the positive effect of this mechanism might well be considerable.

Of course, Greece will have to face an imported inflation shock. But, for a depreciation of 30% of the Drachma in relation to the Euro, this shock should not exceed 6% to 8% during the first year, and certainly less (4% to 6%) the second year. On the other hand, the positive effects on the economy (and on the sector of tourism particularly) might be quite extensive.


The cost of a default for the partners of Greece.

As for the partners of Greece, on the other hand, not only will they have to manage the economic consequences of a default (which will imply renewed action on the side of the ECB) but particularly the financial and political consequences will create problems. From a strictly financial point of view, the reality of a default in the Eurozone will launch a speculative movement by those who will try to guess which country will be the next « weak link. » One can already notice that the rates of Portuguese, Italian and Spanish treasuries are climbing rapidly. But it will be especially on the political level that the shock will be felt most. All the nonsense and gross stupidities about « this cannot happen » having been given the lie, the problem of the Euro will immediately arise. Of course, the governments will strive to limit this political shock. But, if there is one thing we have learned from the Russian financial crisis of August 1998, it’s that the political consequences of an event which everybody was thinking was impossible are devastating for the ideology which has proclaimed the so-called impossibility of this event.

One would then witness an about-face in political (and economic) representations. This is exactly what happened in Russia in August 1998, and explains the ensuing destruction of the liberal forces.

It is certain that those in charge in Europe are at least partly conscious of this problem. But one can think that, caught in the logic of negotiation and of its details, they have lost the understanding of the strategic nature of the present situation. The fact that the question of a possible Greek default was raised by the Eurogroup yesterday only demonstrates it. One can conjecture that those in charge are, at all levels now, confronted with a situation the determinants of which escape them.

There remains the problem of Greece staying in the European Union. We know that the treaties assimilate theece a to theaE\, even if many countries of theaE\ are not in the Eurozone. But, formally, in order to decide that Greece is no longer part of the E\, a unanimous vote of the 27 (28 – 1) countries of theaE\ would be required. However, it is clear that some countries, such as Cyprus and Hungary, will refuse to vote for an exclusion of Greece.

The European leaders would do well to emerge from their autism and to begin thinking hard about theamechanisms permitting an orderly exit out of the Euro while maintaining theacountries inside theaE\, and even – but this is probably asking too much – reflecting about a dissolution of theaEurozone.

A Greek proverb, the one of thea“deceitful dream” sent by Jupiter, well describes theasituation in which European leaders are finding themselves. Its Latin translation is well known:

Quos vult perdere Jupiter dementat prius

(Those whom he wants to undo, Jupiter first renders mad)

We will soon see an application of this ….




Jacques Sapir

Ses travaux de chercheur se sont orientés dans trois dimensions, l’étude de l’économie russe et de la transition, l’analyse des crises financières et des recherches théoriques sur les institutions économiques et les interactions entre les comportements individuels. Il a poursuivi ses recherches à partir de 2000 sur les interactions entre les régimes de change, la structuration des systèmes financiers et les instabilités macroéconomiques. Depuis 2007 il s’est impliqué dans l’analyse de la crise financière actuelle, et en particulier dans la crise de la zone Euro.

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