New Open Europe briefing: Greece could need an immediate cash injection of up to €259bn if it left the euro today
Ahead of the Greek general elections on 17 June, Open Europe has today published the first of two briefings looking at the country’s future inside or outside of the euro. The briefing notes that though Greece may eventually benefit from leaving the euro, the risks involved in an imminent exit could well outweigh these benefits in the short term.
Due to a likely bank collapse and urgent cash shortage, Open Europe estimates that if Greece left the euro now, it would need between €67bn and €259bn in external and immediate short-term support, not including support in the longer term or contagion costs to the rest of the Eurozone. This support could potentially be split between the IMF, the Eurozone and non-euro countries, with the UK possibly underwriting between €4bn and €6bn of the entire rescue package.
The briefing notes that Greece would be able to exit the euro and still remain a full EU member, though this would require the support and approval of all 27 member states and, rather soon afterwards, a full EU treaty change over which the UK would have a veto. Ultimately, the paper concludes that, from a Greek perspective, an exit at the current point in time remains incredibly costly and painful – making a post-election compromise with the Eurozone creditors more likely.
Open Europe’s Head of Economic Research Raoul Ruparel said,
“Given the public support for the euro and the detrimental impact an imminent exit could have on the Greek economy, any new government emerging from the 17 June elections is likely to reach a deal with Greece’s creditors allowing the country to stay in the euro for now. However, as Greece approaches a balanced budget and a more stable banking sector, though still messy, an exit will look increasingly attractive – particularly if the only alternative for Athens is to permanently give up economic and political sovereignty.”
- There are clear economic benefits to Greece leaving the euro, but the risks involved in an imminent exit could well outweigh these benefits in the short term. We estimate that if Greece left the euro now, it could still need between €67bn and €259bn in external short-term support, potentially split between the IMF, the Eurozone and non-euro countries including the UK. These figures do not include longer-term support or contagion costs to the rest of the Eurozone.
- A Greek exit and the withdrawal of ECB support would almost certainly lead to the undercapitalised Greek banking sector collapsing. To avoid a massive bank run and huge losses to pensions, we estimate that banks and pensions funds between them would instantly need a €55bn injection of fresh capital, which would be difficult for Greece to afford without external support.
- The new Greek Central Bank would also need to create at least €128bn worth of the new currency (63% of Greek GDP) in liquidity to help keep Greek banks afloat. This could trigger high levels of inflation, though these might only be temporary.
- At the same time, however, the new Greek currency could devalue by around 30%, which could significantly increase chances of growth, including a potential boost to exports equivalent to 10% of GDP. However, any potential export gain could be diminished if the ‘stub euro’ weakens or demand in Europe decreases further. Unlike previous devaluations in Argentina and Iceland, Greece has few natural resources or industries to fall back on, which may limit the benefits of devaluation.
- An exit and devaluation could also ease austerity and the pressure on the Greek people, particularly in the long term. However, Greece would still need to find immediate savings of at least €12bn to pay various bills, including hospital and social security expenditure.
- Therefore, two steps would significantly boost the prospects of a managed Greek exit from the euro: first, the banking sector should be recapitalised, shrunk, consolidated and restructured. Second, a primary surplus should be achieved to allow the state to fund its day-to-day running costs without external help. This would make an exit far more appealing and potentially beneficial for Greece in the long-term.
- Looking at five different options for Greece over the next year, and taking the factors above into consideration, we assign a 60% probability of a compromise being reached after the June Greek elections, involving a new Greek government (even if Syriza-led). This would see Greece remain in the Eurozone. There is still a 25% probability of the country leaving the euro within the next year. We see a Greek default within the euro and the creation of a parallel currency as highly unlikely outcomes. The worst possible outcome would be if Greece left both the euro and the EU. However, even if a compromise is reached, unless Athens is put on permanent fiscal transfers, a Greek euro exit may now be matter of when, rather than if.
- Contrary to popular belief, Greece would be able to exit the euro and still remain a full EU member, possibly using the EU treaties’ ‘flexibility clause’, followed shortly afterwards by a full treaty change. This would change Greece’s status from a euro to a non-euro member while allowing for temporary measures such as capital controls to be implemented. This would be a messy and highly unpredictable process, and all member states, including the UK, would have a veto over such changes, which could therefore be subject to various domestic political demands.
To read the briefing in full, please click here:
NOTES FOR EDITORS
1) For more information, please contact Raoul Ruparel on 0044 (0)757 696 5823 or Mats Persson on 0044 (0)779 946 0691.
2) Open Europe is an independent think-tank calling for reform of the European Union. Its supporters include: Lord Leach of Fairford, Director, Jardine Matheson Holdings Ltd; Lord Wolfson, Chief Executive, Next Plc; Hugh Sloane, Co-Founder and Chief Executive, Sloane Robinson; Sir Stuart Rose, former Chairman, Marks and Spencer Plc; Jeremy Hosking, Director, Marathon Asset Management; Sir Henry Keswick, Chairman, Jardine Matheson Holdings Ltd; Sir Martin Jacomb, former Chairman, Prudential Plc; Lord Sainsbury of Preston Candover KG, Life President, J Sainsbury Plc; Michael Dobson, Chief Executive, Schroders Plc; David Mayhew, former Chairman, JP Morgan Cazenove.
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