Europe Crisis

What would happen if Greece was to leave Euro Zone?

This is the question only and only two categories of people are asking... Greeks and non-Greeks.

Well, there are no clear answers but there are many hypothesis available. Before that let's look at the two ways in which it will happen.

First, Greece is forced out of Euro Zone when other European Nations refuse to help it. This will create lots of problems for other smaller and in distress European Nations which may also want out before things go as bad as Greece. This will probably result in collapse of Euro Zone (banking system), end of Euro and probably a real unambiguous recession for the World.

In second scenario, Greece may choose to default and leave the Euro Zone voluntarily. This may be a better option for Euro Zone and it may just save it. In such case (if it happens when there is still time) EFSF will have more leeway to help Italy whose failure can have disastrous consequences across the world. It might just save Euro as a currency and it may actually turn out as stronger one after loosing it's weakest link of Greece.

What will happen to Greece?

There are again two possibilities.

First the bad news... total mayhem. Greece's new (or old) currency will devalue very rapidly. There will be bank runs by depositors to withdraw or transfer their savings in Euro. Because of fast drop in the value of the currency there will be high inflation (could be very high actually). Greece will open up their printing presses to print the money and pay back it's debt. This will also cause shrinkage in the GDP in actual terms. Greece citizens will face the double whammy of negative growth as well as high inflation.

Rest of the World also may not take this lightly and may ban or restrict trade with / investment into Greece. As it is Greece does not have many exporting industries and like many other Euro Nations, its appeal to Tourists is nothing extraordinary within Europe. It's banks will certainly fail and so many other who are exposed to Greek debt. While many will fail, many will be recapitalized by their own Governments, Unlike 2008 World financial freeze, there are ample warnings of these so initial shock will subside quickly and contingency plans (which have been definitely prepared by now) will be put in action.  After some time, World will move on. After how much time... depends on a Zillion factors.

Second scenario... and you have to rewind about a decade. Argentina was faced with a similar situation because it's Peso was pegged to Dollar as 1:1 and it was having huge debt (actually unmanageable) to repay. What they did? They decided to default but they planned it well. When they decided to default, they removed the pegging of Peso and at the same time froze all the bank accounts to prevent bank run (that was about Christmas time... you can imagine). Obviously people took to streets, burnt cars and looted shops and all that. Peso lost it's value and it soon became almost 4 Peso for 1 Dollar. Inflation increased to extremely high levels due to dependency of Argentina on Imports.

However, a week currency also made Argentinian Exports cheaper. Their exports to rest of the World soared and their new Government implemented policies to reduce their dependence on Imports. Over the years, after improvement in situation and creating trade surplus, Argentina started to buy back Dollars bringing Peso rate down. They also reopened negotiations with their debtors and finally paid 25-35% of original debt to clear the dues. There was lot of hue and cry from lenders, many went to arbitration and cases are still on... and Argentina still can't borrow at some places... who cares?

Similar story happening in the Greece is the ideal case for them. A systemic cleansing and disciplined approach with devalued Drachma (Greece's old currency) may make Greek assets very attractive to Investors around the World. Risk will be there but the possibility of good return will make 'not-so-risk-averse' entities reach Greece. Slowly but surely new political set up will find ways to build up GDP and growth will return. Meanwhile lenders will need to be treated taking a clue from Argentina. Obviously some European Banks will need some help from their Governments to stay in business and some will cease to exist. Life will move on after some time... 'Time'... which will be decided by a Zillion factors.

This is totally offbeat post which have been doing rounds in my mind for many days... I feel the possibility of Greece defaulting eventually is very high and that may trigger some scenario. What I wrote here could just be one of them.

Our trade analysis and post for next week will have to wait till Sunday. Would love your comments till then.

Have a great weekend.