BE CAREFUL WHAT YOU WISH FOR.

Greek voters resoundingly voted no, decisively rejecting terms of international bailouts in Sunday’s referendum, but the big question is what is next? Even with controversial finance minister Varoufakis’ resignation, will Prime Minister Alexis Tsipras be in a better position to negotiate with 61% plus behind him, or will the European Union policymakers dig their heels in? The jury is out whether the country is heading out the Euro door and even UK bookies have stopped taking bets due to the volatility of the situation.

Perhaps analysts at Citi summed up the mood best when they dubbed the current situation: “Grimbo” or Greece in limbo. As they pointed out in their note, Grimbo “is a near-certainty and Grexit (Greece Eurozone exit) risk has risen. However, even then, a formal Grexit could still take months or even years to happen.

Returning to the Drachma would allow the country to keep printing money until monetary policy was loose enough to stimulate economic growth and exporters would benefit from a weaker home grown currency. Greece regularly devalued the Drachma, taking it to over 300 per Dollar before it was replaced by the Euro in 2002, from 30 to the Dollar in the 1970s.

The danger, of course is that the government would print so much of the new currency that it would fall too far, creating inflation and soon lacking credibility with the people. Further hardship could lead to a technocrat-run government, civil unrest, or a return to the past in the form of a military coup.

In the meantime and more immediately, Greek banks are fast running out of cash even with capital controls and are unlikely to re-open this week unless the European Central Bank approves an increase in emergency loans today. The ECB may decide it needs the eurozone to guarantee Greek debt if it is to continue supplying emergency loans, as it did in 2012, a decision that would have to be taken by leaders.

Not surprisingly, there are no easy answers but one reasonable solution put forward by some economists is a write-off of Greece’s debt, or at least a deal that would not require any payments for the next ten or 15 years. Additional aid would also have to be injected to help kick start its economy but the population will also have to realise that they will no longer be able to retire early or not pay taxes. Unfortunately, positions have become entrenched and compromises will have to be made. If not, that old saying – be careful what you wish for – has never rung truer.

Lynn Strongin Dodds,
Editor

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