Anyone who follows the markets is well aware of the ongoing sovereign debt crisis in Greece. Even after receiving 110 billion euros in bailout money to buy time for new austerity measures to kick in last year, Greece is still in no position to privately raise enough money to cover their debts. Taxpayer protests are becoming more frequent, their debt continues to receive downgrades, and major restructuring looms on the horizon. With the problem become more serious every day, it’s about time we started to think a few months down the road about whether or not the euro will remain as Greece’s currency. Or if it will even exist at all.
Sure, it would take a hell of a lot for the euro to vanish completely in the next few months, but the idea of Greece dropping the currency isn’t that farfetched. After extensive measures have already been taken to eliminate their deficit, the Eurozone leaders are beginning to run out of options. Foreign investment has already come to a standstill. This is undoubtedly the worst off the euro has been in its short history. Let’s go ahead and think about what could happen if things don’t turn around for Greece (worst case scenario, of course).
1. The spread between Greek bond yields continues to grow and Greek deficit increases. Political foundation is getting shakier by the day. The IMF decides they aren’t confident that Greece will be able to fill financing gap for the upcoming year, and they decide against providing additional bailout payment. The IMF’s payment would most likely fall to the EU and to nations like Germany and the Netherlands that are tired of holding Greece’s hand. Just because they share a currency with Greece doesn’t mean they enjoy being responsible for keeping another country’s economy afloat. They don’t want to pay. To top things off, Greece probably won’t be returning to the financial markets next year, which will cause them to miss out on an additional ~24 billion euros.
2. With no way to raise enough money to cover their 13.4 billion euro debt that’s due, Greece defaults next month. This action causes Greek credit rating to plummet and its shockwaves spread to the country’s businesses and banks. It also causes troubles in other EU nations. Portugal and Ireland can expect downgrades, and confidence is lost in the entire bailout process. Skepticism will arise over whether or not other European nations are credit worthy, and a huge gap will form between the highly rated countries and the ones with junk ratings. Fragile nations like Italy and Belgium start to feel the pressure of their own downgrades.
3. With basically no other way get back on the right track without enduring a painful recession, Greece decides to drop the euro in place of a much cheaper drachma. Now that they are in control of their own currency, they devalue the crap out of it and start fresh. Meanwhile, the rest of the euro zone is reeling. Portugal and Ireland become the new Greece, and more bailouts are required. The euro begins to devaluation, and confidence is lost in the EU. Countries revert back to individual currencies, and the short-lived euro fades into history…
Of course, a significant chain of events would be required for this to happen. This is also coming from a civil engineering undergrad whose interested in economics, not a Ph.D in economics. But something this drastic COULD happen, and it could change the way us we trade currencies forever. Just a little something to keep your brains churning over the weekend. Good luck finishing up the week!
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