Greece goes to the polls on June 17, which many see as a referendum on the single currency. The previous election failed to generate a consensus as people rejected austerity measures and there was a fractured mandate, necessitating another round of elections.
Citigroup says Athens will leave the EZ in January. However, Paul Krake, the founder of View from the Peak says Greece would possibly leave the euro much earlier, by September – October of this year.
The reasons for an early exit are manifold. Greece has witnessed a dramatic fall in tax receipts, and they are likely to run out of cash by June. However, money may not be forthcoming immediately without a legitimate government. Eight out of ten Greeks wish to stay in the single currency zone, but seven out of ten Greeks reject the austerity measures.
The eurozone leaders have said in no uncertain terms that they wish Greece to stay in the union, but they also want Greece to honor their commitments on deficit reduction. The Germans have already clarified that they can’t force Greece to stay in the eurozone.
The contagion effect immediately after Greece’s exit is unclear, and it’ll be difficult to predict what the fallout will be 5-10 days after the departure and to what magnitued. But globally, there will be a massive monetary stimulus by the central banks of China and Japan, the Federal Reserve, the European Central Bank and the International Monetary Fund. A contingency plan will be put in place if it not has been put in place already. The question in my mind is whether if will be effective in bailing out leveraged institutions on such a massive scale.
The likely intervention will involve a deposit guarantee scheme across Europe, buying up of the euro to arrest a massive slide of the currency and US dollar swap-lines will be opened up to ensure adequate liquidity and stability of the currency zone.
Paul personally thinks the euro will bottom out following Greece’s exit and a contagion can be halted.
Greeks will eventually realize that life without the euro will be a better proposition than life within because the austerity will last for years, if not decades, and there will be the “lost generation,” young Greeks who can’t get jobs.
A similar situation had played out in 2000 when Argentina had defaulted on their international commitments. The currency was sharply devaluated, the GDP had shrunk by 16 percent in 2001, but the economy had rebounded in 2001. You can watch the video here.