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FT: Greece Can Say No to Creditors Without Catastrophic Consequences

Greece? Future? EURO? - tinted
Greece has nothing to lose by saying no to creditors,” is the title of an analysis by The Financial Times that says bankruptcy and a subsequent Grexit would not be catastrophic after all.
According to the article, Prime Minister Alexis Tsipras has to choose between accepting the fiscal targets and reforms proposed by the troika or getting out of the euro zone. If he chooses the agreement, it would be double suicide: political suicide for Tsipras and death of the Greek economy, as in a four-year period the Greek debt would reach 200 percent of GDP.
However, if he chooses to exit the euro zone, it would be for good for three reasons, says the writer of the analysis, Wolfgang Munchau:
First, Greece would get rid of the extraordinary fiscal adjustments. The country would have to run a low primary surplus that could require a one-time adjustment and that would be all. Greece would default on the troika of lenders but service private debts, so that in the future can ask for loans from the international markets.
The second reason is the reduction of risk. After a Grexit, nobody would fear a currency redenomination risk. There is no fear of default since Athens has already defaulted and will be very keen to gain the trust of private investors.
The third reason is the impact on the economy’s external position. Greece is a relatively closed economy. About 3/4 of its GDP is domestic, while the rest comes from tourism, a sector that would benefit greatly by a currency devaluation.
The negative impact of a Grexit would be short-term only. A sudden introduction of a new currency would be chaotic in the beginning. Capital controls are very likely and there will be losses, but after a year the economy will recover, the analysis says.
It would be logical for Greeks to prefer an exit from the euro zone, Munchau argues. However, the Greek government does not have to decide this week. If Tsipras chooses to say no and misses the deadline of the June 18 Eurogroup, then Athens will default on its repayments due in July and August. A Grexit would be possible then, but not certain. Up to that point, Greece would still be in the euro zone. However, it would be forced to exit only if the European Central Bank cut liquidity to Greek banks. It could happen, but it is not certain, either.
If things reach that point, creditors may reconsider restructuring the Greek debt. If Greece were to go bankrupt, Germany and France alone would lose a total of 160 billion euros. German Chancellor Angela Merkel and French President Francois Hollande would not like to be financial “losers.”
If the European leaders agree to ease the Greek debt now, both sides will benefit. Greece will remain in the euro zone and its debt would be sustainable. Creditors, on the other hand, would be able to cover some of the losses.
Therefore, the analysis concludes, Greece has nothing to lose if it says no to this week’s proposal.

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