Greece’s temporary suspension from Euroland

Alexis Tsipras

It would take many weeks for a new rescue package to be implemented. Unless partners guarantee further loans from the ECB, defaulting on the next payment to the central bank in a few days would trigger a financial implosion. With the exceptional liquidity line cut off, Greek banks would be unable to provide cash to the economy and to the starved public coffers. To stave off the massive ensuing collapse, a parallel currency would need to be introduced to ensure the country keeps going.

A temporary suspension from the eurozone would prevent the awesome backlash a full-fledged Grexit might provoke. The parallel currency would allow for some breathing space until a brand new and comprehensive rescue package could be broked. The weak currency would be severely devalued, providing ample room to increase competitiveness as long as cost inflation does not damage these gains. A future return to the euro, with a reduced exchange rate, would ensure that Greece had the competitive edge it totally lacks at the moment.

This trick might prove to be the only way to ensure Greece’s chances of recovery and growth. Greek people would find themselves poorer in the short and medium term. But they would have a better opportunity for getting jobs and recovering welfare levels in the future.

The European partners should grant a sizeable debt relief. A weak Greek currency scuppers any chance of paying back any liability, at least for a substantial period of time. It is up to them to choose the best way forward. Should they insist on avoiding a default, they are bound to provide extra cash for Greece. No single country has the ability to repay its debt pile on its own. They all resort to capital markets to refinance their current servicing. Only insolvent countries, such as Greece, live off other partners’ financing.

If the eurozone ditches all hopes of providing extra cash to Athens, thus preventing it from revolving its debt, then there will be an outright default amounting to roughly half a trillion euros. Even if such losses hit budgets over a period of time, they might put too much downward pressure on weaker economies. A worst-case scenario at a time when Europe is making numerous efforts to  get a recovery back on track.

Devaluation of the Greek national currency would serve as a reference for debt restructuring. Lenders would face a severe loss but, at least, they could salvage some of the money owed to them. From a financial perspective, it does make sense. The only snag is that such an option could potentially weaken leverage for forcing Greece to implement reforms and budgetary control plans.

About the Author

JP Marin Arrese
Juan Pedro Marín Arrese is a Madrid-based economic analyst and observer. He regularly publishes articles in the Spanish leading financial newspaper 'Expansión'.

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