Daily Management Review

Greek Exit- Eurozone at Risk


03/09/2015


Greek exit from Eurozone will create a contagion impact across the globe.



Greek Exit- Eurozone at Risk
Greek’s uncertain economy once again slipping back towards recession has increased tensions throughout the Eurozone. Since 2010 the Greek economy has underwent debt crisis when the EU discovered irregularities in accounting procedures followed by the country. Two bailout programs for the year 2010 and 2012 provided total funds of about €240 billion as financial assistance to Greek economy. Meanwhile, the sudden elections for Greek presidency called in the end of year 2014 proved to be a big game changer that adversely impacted the confidence of consumers, investors as well as the corporates. After winning 2015 elections, the left wing Syriza party promised to end the austerity measures.

According to European Central Bank, the deposits held by monetary financial institutions of Greece dropped to about €155 billion in Jan-15. The EU is under a threat that the contagion impact of the Greek Exit from Eurozone could spur other European nations to follow its footsteps. Moreover, the new government has assured that it will be able to meet its fund requirements for March 2015 and repay back loan of around 1.5 billion Euro to IMF. If Athens initiated implementation of necessary reforms, the Greece international creditors are expected to pay the remaining amount of 7.2 billion euros to its bailout funds.

Followed by intense negotiations, Greece entered into a bailout amendment providing four month extension to its program and hence avoiding its exit from Eurozone which was probably led by the expiry of bailout package on 28th Feb 2015. This extension prevented the possibility of banking meltdown, however, the nation is still experiencing substantial drop in its revenues and towards March end it is likely to run out of cash.

If Greece is unsuccessful in meeting its fund requirements through international markets, there is a possibility that it will need the assistance of third bailout program. Hence, Greece’s Prime Minister, Tsipras is witnessing intense pressure to initiate negotiations for its third financial assistance program that is likely to take effect in Jul-15. The country will be required to repay nearly €6.7 billion to ECB.

Already the EU was witnessing persistent drop in consumer prices. The Greek’s exit would further aggravate tensions, forcing international investors to liquidate their European assets which in turn could lead to a deflationary spiral. If Greece leaves EU, the investors are likely to view other European weak markets such as Cyprus, Ireland, Spain and Portugal as risks and charge higher interest rates. Consequently, the Euro currency is likely to face devaluation and will also create a ripple impact on other Eurozone nations thereby leaving the European market vulnerable to investors. Meanwhile, Greece’s top priority is to concentrate on its growth agenda and cut down unemployment.

An uncertain European economy could further spread shocks to the international energy markets which in turn would damage worldwide exports. Eventhough the global economy is much stronger than it was during the earlier Greece debt crisis, the world economy accompanied by the fear of zero interest rate may not be tough enough to withstand the impact of Greek exit and the European financial crisis.



Tags : Greece Exit




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