Media agencies around the world may be constantly reporting on an impending Greek exit from the Euro Zone, but there are warnings of a possible negative outcome in the Greece situation, which could prove disastrous for the future of the European Union as well.
Michael Sivy from Business Time reported in his article “Euro Crisis: Why a Greek Exit Could Be Much Worse Than Expected,” that a catastrophic domino effect could occur in case Greece does leave the common currency system.
The author elaborates on the scenario of Greece returning back to its national currency, the drachma, and devaluating it, in order for the country to get the chance to stabilize its economy within the next few years. However, even if prices and salaries would be adjusted to the new currency value, foreign lenders would not accept to get their money back in a devalued currency, which means that the Greeks would have a higher debt to pay.
“There would be lawsuits over which currency to use, or borrowers would default on the loans, or lenders would be forced to accept reductions in the amount of the loans that have to be repaid, in order to avoid outright defaults. Whichever outcome occurs, the lenders lose money,” reads the report. The remaining Euro Zone countries would then have to support their banking sector suffering from the Greek debt losses and taxpayers would be called to make up for them.
But there are two other scenarios that have not been examined as thoroughly as they should have.
According to the first, the global economy could suffer a severe blow if credit derivatives secured by Greek bonds would lose their trustworthiness. “What if one legal system accepts the conversion of euro loans into drachmas and another doesn’t?,” wonders Sivy, given that these complex security investments are governed by the law of the country from which they originate.
The second scenario predicts that other financially “troubled” Euro Zone countries might want to abandon the common currency after watching Greece boosting its economy by becoming more competitive with its devalued currency. “A 30% drop in the exchange rate might make a vacation in Greece the best deal in years,” adds the author, noting that this could be the beginning of the end of the Euro Zone.
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