Conditions for a successful “Grexit”

Note kindly translated by Anne-Marie de Grazia 

The question of a possible « Grexit » has been evoked again at a reunion of the Eurogroup on Saturday, July 11th. It would mean an expulsion of Greece, unless its Prime Minister consented to present his resignation, despite a massive vote of confidence at the Parliament during the night of Friday to Saturday, and despite the success of the “No” at the referendum of July 5th. The conditions of an emergency exit of Greece from the Euro must be studied very carefully in consideration of Germany’s positions in the Eurogroup. Should the stalling of negotiations at the Eurogroup persist, and in the face of the now evident bad faith of some of the interlocutors, among whom must be included Mr Schäuble, the German Minister of Finances, and Mr Dijsselbloem, the President of the Eurogroup, one cannot exclude an emergency « Grexit » as early as next week. Confronted with such an eventuality, Greece would find itself in a difficult situation indeed, for its banks are short of liquidities, with very serious balance problems, and the Central Bank (the Bank of Greece or BofG) has no reserves. But this situation is far from insoluble and should not frighten the Greek government unduly. So that, if an emergency « Grexit » must be contemplated, the following problems will need to be addressed, going from those of the reserves of the Central Bank to those of liquidities, over the question of the debt:


  1. The question of the reserves of the Central Bank

It is admitted that a ratio of reserves in relation to GDP of 1/30 to 1/20 is enough for a country whose current account (balance of exports-imports of goods and services) is in equilibrium. The GDP of Greece is presently of 200 billion Euros, that’s approximately 220 billion dollars. A relation of 1/20 would give us therefore 11 billion dollars. Let’s raise the sum to 20 billion to measure up with the unexpected. This sum could come from several sources:

  • The government could use as security part of the resources from tourism, which represent at present 17% of GDP. If one applies a VAT rate of 23% to this sector (hotels and restaurants), the tax revenues used as security will amount to 8.5 billion dollars. The government could emit certificates securized by this amount.
  • The Greeks have expatriated during these past months over 35 billion euros (amounting to an equivalent of 39 billion dollars). They will have to bring them back into monetary circulation, be it only in order to pay their taxes. Under these conditions, 20% of this sum could be affected to the reserves of the Central Bank, that is 7 billion dollars.
  • Greece could ask countries with whom it is in good relations for an additional loan of 5 billion dollars.

This money would go to supply a reserve fund for the new currency. In consideration of the current account being in equilibrium, it would be sufficient to stabilize this currency. In fact, in consideration of this quasi-equilibrium of the current account, one can think that this reserve fund would need to be used very little. Capitals controls already in vigour make it possible to limit the hedging of speculative positions on the future Greek currency.


  1. The question of liquidities

Greece is today strangulated by a lack of liquidities. The fact is well established. This strangulation, a modern version of the garrote of Ottoman assassins, is entirely linked with the politics of the European Central Bank. Confronted with this, the Greek government can emit IOUs at three or six months to which it can confer a legal exchange rate and which it would accept in payment of taxes. This would allow the economy to find back to liquidity.

But, as we have said in a preceding note, the solution of choice would be in reality a requisition of the Central Bank. This requisition would have to be undertaken in the framework of emergency powers which the Greek government would not fail to invoke if a « Grexit » were certified. This requisition permits, temporarily and while waiting for a new law defining the organization of banking to be voted, to place the BofG under the direct control of the Ministry of Finances and to replace its present director. This operation would allow the government to free the reserves held either in the BofG or under the BofG’s control in commercial banks. Anyway, in the case of an exit from the Euro, a requisition of the Central Bank will become mandatory. In combining both methods, the Greek government would loosen the garrote strangling it today. It would also show to all agents, Greek or foreign, its resolution in taking hold again of its currency and of its own destiny.


  1. The question of the debt

Next arises the problem of the Greek debt. This a considerable debt in regard of GDP, amounting to 341 billion euros. In the case of a depreciation of the new currency, it is clear that the onus of this debt, which already is weighing very heavily on Greece, would be increased. This debt has been emitted out of Brussels and Frankfurt in the framework of aid plans which were in reality plans for the transfer of debt-claims detained by private banks, over to the States of the Eurozone. This constitutes an important difference with the debts of France or of Italy, debts which were emitted under much more normal conditions, and which are in majority (at over 97% in the case of France) emitted under national law. In the case of Greece the problem is that – in these particular conditions – the lex monetae does not apply. There is therefore no other solution than a default on the debt, as Russia did in 1998. Once this default is effected, conditions of an IOU (at 20% or 30% of face value) can be discussed. But it is very important that the Greek government announce the default on its debt in the same time as it takes record of the fact that the Euro can no longer have legal currency on its territory. In fact, the questions of the change of currency and of the default are narrowly linked.


  1. The question of the commercial banks

Greek commercial banks, in the case of a default on the debt and of a break-up with the ECB, will find themselves bankrupt. The amount necessary for their recapitalization is evaluated presently at 25 billion euros by the IMF. This is a considerable sum. These commercial banks must therefore be nationalized but, taking inspiration from the Icelandic example, the Greek government would do well not to seek to recapitalize them entirely. In fact, the “investment bank” part must be left to itself and must default. On the other hand, the circulation bank part must be salvaged. This part can operate under the control of the State, with a guarantee of the deposits of the population through an exceptional aid granted by the Central Bank, or BofG, which will have been requisitioned beforehand. This part will have to be recapitalized and to this aim, the government should emit a compulsory loan for all households earning over 60 000 euros a year, a loan the interests of which would be equal to inflation.


Such would be the mandatory measures if Greece were to be expulsed from the Eurozone, an unheard of measure, which would liberate Greece of its obligation to respect treaties, at least in the monetary domain. This does not exhaust the subject. It is clear that in this case, the responsibility of Germany would be immense, and that other countries could very seriously consider quitting the Euro themselves, provoking in fact its dissolution. But at present, the urgency is to show the road that Greece might go in order for this « Grexit » to occur in the best way possible, even if it means, later on, bringing the ECB and Germany to court.


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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