Raghav’s Take: What If Greece Exits The Euro?

Everybody is dreading Sunday. Will Greece pull out of the Euro? Will that trigger a 2008-like post-Lehman global financial meltdown? Guys, relax a bit.

For a minute, let’s look at the worst possible outcome – viz, that Greece pulls out and re-launches its own currency, the Drachma. Now this is Apocalypse – the new drachma will fall rapidly against the Euro, dollar and other global currencies; Greek asset values will plummet leading to massive defaults and bankruptcies.

The contagion could spread to other European countries like Spain, Cyprus and Italy – and if that were to happen, we could be staring at a 2008-like Armageddon.

The impact on India could be significant, as exports to Europe fall, and global funds pull money out, leading to a fall in stock prices and the Rupee. But relax. All of this is not likely.

As The Economist wrote, the Greek crisis is a process, and not an event. Most probably, after the outcome of the Greek referendum is known on Sunday, either the government will lose its bet, in which case Greece will accept the bailout conditions and get a quick and generous lifeline from Germany, European Central Bank and others.

However, even if the Greeks give a “yes” vote, my bet is that their leaders will have to buckle down into fierce negotiations with European lenders, and a middle-way solution will have to be hammered out

Greece will be allowed a longer period to make painful adjustments, ie instead of cutting pensions in half in two years, it may be allowed to cut them by a third in 4 years, or some such compromise will be agreed to; some amount of Greek debt will be rescheduled, i.e, it will be given a few extra years to pay back its loans; and in return for these concessions, Greece will have to agree to a few other conditions.

Net net, if I were a betting man, my wager would be that Greece will stay with the Euro, and win a few more concessions than its lenders are willing to give it now, in the eyeball-to-eyeball phase.

So onwards to a dramatic Sunday – ironically, it was another Sunday in mid September 2008 when Lehman went bankrupt, but you don’t wanna think about that now!