Tag Archives: Grexit

What Greece Government Should Think about

The possibility of Grexit has been like dark clouds hanging above heads of financial institutions and people concerning this issue. Potential problems such as inflation, bank run, default risk and loss of competitiveness make “Grexit or not” a vital battle.

To keep a smooth international trade just as time before Grexit, Greece government should manage to maintain the resemble trading environment, i.e. to keep the advantages unified currency brought about, such as minimal transaction barriers and elimination of cost of trade. Substantial internal devaluation in Greece generated a small export boost, however, the regain of competitive led to an even excess export demand in Spain, Portugal, Ireland and Italy. Therefore, the international trade shock due to Grexit cannot be overlooked.

In order to achieve low target inflation and a relative fixed exchange rate against US dollar, Euro and Swiss Franc short after Grexit, the central bank of Greece should guard an interest rate close to major countries in Eurozone to shocks of hot money. The inflation is more likely to occur due to the pressure on printing money for recapitalize the banking system to guarantee a normal banking liquidity. The sour of quantity of Greek drachma will intensify the pressure on fixed exchange rate policy and the demand for Euro could drain the bank out of currency. Exchange control may help this problem.

Foreign investors are the primary hope of Greece to survive out of the swamp. The bailout program with the European Central Bank, the European Commission and International Monetary Fund will expire at the end of February after Prime Minister Antonis Samaras secured a two-month extension in December. Obtaining confidence from foreign investors decides the backup inflow of funds, and especially for the debt redemption and the repayment of principal. Inevitably, the success in the approaching vote and sustaining a situation under control will be the life-or-death bet. If the policy and tendency under the new government is not in favor of foreign investors, Greece should find out new ways to boost the economy.

No one knows how the situation will walk to; it is possible that Greece can hardly default its debt. Due to the fear of default risk, the real interest rate in Greece could be high, which will lead to high interest rate risk for banks and corporates who hold bond portfolios and loans. Financial institutes should carry out pressure tests with respect to interest rate risk in order to keep a steady and predictable cash flow.

Grexit or not, that is a question

With the Parliament’s failure to elect a new president of a state by the opposition Syriza party on the last week of December, the early national election is at the corner, which scheduled to be held on Jan. 25th, 18 months earlier. The topic of “Grexit” is brought onto the table again.

As indicated by nine separate opinion pools conducted on the weekend this month and published this weekend by Greek media, the Syriza opposition party has a higher margin of between 2.7 and 5.5 percentage points that edges out the ruling New Democracy party. The majority of survey shows, however, neither Syriza nor the ruling New Democracy Party would secure enough votes to win a majority in Parliament even with the bonus 50 seats, which is awarded to the winner of the election according to Greece’s electoral rule. In this situation, a coalition government will be a rescue solution. Further more, if neither party could build a coalition government, Greece would be forced into a second national election within weeks. So the future of Greece and whether Grexit is going to be a truth will still be mysterious after Jan. 25th.

The finance misister, Gikas Hardouvelis, pointed out that the political uncertainty would lead to broken of international creditor and low developing rate after these years of struggling in the debt crisis from 2010.

“If you lose the first quarter of the year, where the economy could have taken off, and then perhaps the second quarter, that gives you half the growth that you would have otherwise had,” Gikas Hardouvelis said.

In respond to this uncertainty, financial institutions and banks in Europe are implementing stress testing for their internal systems, some also dusting off two-year-old contingency plans for the possible Grexit. The leading firms such as Citigroup Inc. and Goldman Sachs Group Inc. are international corporations, so that the testing on credit exposure and cross-border funding to local operations would be a significant task for them. Other problems to consider and not limited to after the reintroducing of Greek drachma are:

  • How much capital restriction in the Eurozone should carry out after the breakup?
  • How much Greek drachma should be print and how to spread it out to the public? Would it be accompanied by inflation in the near future?
  • Will there be a booming of underground market for currency trading?
  • What would be the impact on the international trade among Greece and Eurozone countries?
  • Should the Greece government implement a floating or fixed exchange rate policy?