Managing a Greek Eurozone Exit

There are two ways that Greece leaves the euro, and both are philosophically the same thing. The first way is if Greece wilfully flouts its commitments to the troika. The second is if the rest of eurozone decide tomorrow that a closer fiscal union that includes Greece is unworkable and that the chances of another bailout within a year are very high. If that is the case, they will demand greater austerity measures in the full knowledge that Greece will baulk and push back from the table.

It seems likely that Antonis Samaras will win the next election in Greece, and this statement made during the preamble to the budget reforms vote yesterday is highly inflammatory:

"I am calling you to vote for the new loan agreement because I want to avoid falling into the abyss, to restore stability, so that we can have the possibility tomorrow to negotiate and change the policy that is being imposed upon us today."

The reality is that Greece is running a primary deficit and has no tax collection infrastructure. Furthermore, bank deposits are non-existent and the economy is contracting rapidly. The EU wants to get Greek debt to a figure of 120% debt to GDP, but the denominator keeps shrinking. As an aside, the 120% is not just a random number, it is the level of Italian debt to GDP - the implied message is that this is a sustainable level.

The only way that Greece lives to fight another day is by exiting the eurozone and sharply devaluing the new drachma. Like Argentina, it can re-denominate all debt and bank deposits in the local currency. This way the solvency risk is eliminated, however the threat of hyperinflation is real. In the long run, Greece becomes a cheap holiday destination again and perhaps reinvents itself in other ways.