Why A Greece Exit Might Be Reasonable

Greece just recently agreed to comply with a €450 million payment to the International Monetary Fund to avoid default, but the struggle is far from over. Greece still has a tremendous amount of debt on its hands and unless it can work out economic restructuring plans within the country or work out a new bailout plan with its creditors, with the way things are going, it is only a matter of time before it will start to break some of these obligations. In the event of a default, it is possible that Greece could make an exit from the Eurozone. Given the current situation, however, with the state of the Eurozone currently, a Greece exit might not be the worst outcome for the world.

Perhaps the biggest threat posed to the Eurozone regarding the Greece situation is if creditors bailed out Greece yet again without ensuring any enforcement of reforms. The new Syriza government, hoping to return to higher government spending and to deviate from deregulation, has not instituted any significant reform measures to cut government spending and promote growth.

Given the stubbornness of the new government in Greece, a Greek exit might be less negatively impactful than an easy bailout. The amount of debt held by the private sector is relatively small compared to recent years. Contrary to the situation in prior years, a significant majority of Greece’s debt is held by government bodies and official creditors, such as the IMF. These entities have the resources and resilience to absorb any potential loses related to an exit. An exit would, however, raise questions about the integrity of the Euro, but it could just as much serve as a wake up call to nations on the brink of falling into a similar situation. Furthermore, in a time when the Eurozone really needs a boost, it would be devastating if creditors succumbed to Greece’s demands without any promises of reform.

All in all, Greece will definitely feel the full force of an exit from the Eurozone. First and foremost, if the Greece falls back to the Drachma, it is likely to experience periods of rampant inflation. Greek banks might be vulnerable and people will likely lose confidence in the government to protect their interests. Given the current situation, it might be time to start focusing discussions on how to minimize the damage that would inevitably come with an exit.

-- Pavan Mahtani