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A dignified 'Grexit' is unlikely

Kevin Davie

Whether the Greeks are left with a much-diluted drachma or not, there is still more pain ahead, writes Kevin Davie

Speculation about a debt default has sparked massive savings withdrawals from banks. (Louisa Gouliamaki)

An economics reporter for Sky News this week demonstrated how you created a new currency from an existing one, say, a drachma from a euro. You take the euro and tear off a piece. Now it is a drachma. It is that easy.

Alternatively, according to the Sky News demonstration, you take a euro and stamp a big D on it and you have an instant drachma.

The day after the demo I was discussing this currency conversion with a small group that included a South African of Greek descent, who pointed out that Greece already had its own euro. She explained that this euro has Greek writing on it.

This is surely not the case, a colleague told me the next day, reaching for a €5 note she had recently picked up in Turkey. Sure enough, it had the words “Euro Eypo” on it, eypo being Greek for euro.

You can be sure, though, that when the time comes for the Greeks to depart the eurozone – as most people, including International Monetary Fund chief Christine Lagarde, think can only be a matter of time – they will not be allowed to take their Greek euros with them.

Caretaker president
Not that there are likely to be any Greek or other euros in Greek banks by then.

On Monday this week alone, people with savings withdrew €700-million from Greek banks, according to its central bank.

Figures quoted by Reuters show Greek businesses and households had €165-billion on deposit at the end of March, having withdrawn €72-billion since January 2010.

Greece announced this week that its inability to form a government after its recent election meant that a judge would act as caretaker president, pending fresh elections on June 17.

One Greek interviewed on television seemed to sum up how hopeless things were. He said that Greece could not even feed itself, the implication being that, cut loose from the European breast, its people would starve.

Not that bad
But the situation is not that hopeless. Figures published by economist Paul Krugman indicated that Greece earned the equivalent of 24% of its gross domestic product (GDP) from the export of goods and services, not too dissimilar from Argentina’s 25% when it defaulted in 2008. Greece also had big-ticket foreign-exchange earners in shipping and tourism.

Greece goods exports were worth €1.7-billion in January, Bank of Greece figures published by website tradeandeconomics.com show.

Its main exports are fruit, vegetables, olive oil, textiles, steel, aluminium, cement and various manufactured items such as clothing, foodstuffs, refined petroleum and petroleum-based products, and its  main export partners are Germany, Italy, the United Kingdom and the United States.

Greece’s imports were worth €4-billion in January and its import partners are European Union members Germany, Italy, France, the Netherlands, the UK, as well as Russia and China. It is a net importer of industrial and capital goods, foodstuffs and petroleum.
 
There should be no doubt that, whether or not there is a Grexit, as a possible Greek exit is being dubbed, the Greeks are in for more pain.

Devalued currency
A Grexit, some pundits are saying, could result in the drachma devaluing 50% against the euro, which would boost exports and potentially make Greece an attractive holiday destination, assuming that the place remains politically stable.

But the devalued currency would also come with mass unemployment, inflation of 50%, a 20% loss in GDP and a debt-to-GDP ratio of 200%, according to analysis by BNP Paribas quoted by the Guardian.

My South African-Greek interlocutor told me of her aunt, a civil service worker of 20 years experience, who has had her salary cut from €600 (R6348) a month to €200 (R2116).
 
The aunt lives in a house she inherited, but fears that a new tax based on the size of the house will mean she would be unable to afford it.

The average salary in South Africa for a public sector worker is about R17000 a month, according to Mike Schussler of Economist.co.za.

Working 24 hours
A teacher has had her salary cut from €1600 to €750, with tax payable of €175 and another tax of €120 for an 80m2 home she inherited.

Petrol, at €2 a litre, is about twice what we pay in South Africa.

Said interlocutor has a 60-year-old uncle who is a government worker in the shipping industry. He has had his salary cut from €2500 to €1500 a month and his working hours have nearly doubled. “He basically works 24 hours.”

Where a car license in South Africa may cost R350, the equivalent in Greece can cost R5000. Vat is set at 23%. “If you breathe, you pay tax,” my informant told me.

Greece contributes a relatively parsimonious 2.2% to eurozone GDP, but its impact is far greater than this. Banks have for some time been reducing their exposure to Greece, but its seemingly inevitable collapse will put strain on other, larger eurozone economies that are also challenged in terms of growth and debt.

Important trading partners
Politically, whereas the eurozone’s two leading lights, France and Germany, sang off the same song sheet, the fresh-faced François Hollande has come to office on a pro-growth ticket and is yet to harmonise with the pro-austerity Angela Merkel.

As if all this is not enough, the Americans are about to hit their debt ceiling again, raising the spectre in these pre-election times of the Republicans and Democrats being unable to agree on what the song is, never mind who will sing it.

Foreign selling this week put pressure on the rand, which fell to R8.37, as renewed euro jitters sent investors scurrying for the perceived safety of low-return assets such as United States treasuries.

We tend to worry about the potential loss of trade when important trading partners such as Europe underperform, but the effect of a flailing Europe has a far greater and more immediate financial impact.

As we report in this issue, the implementation of Basel III reforms agreed to in 2009 after the 2008 meltdown in financial markets has led the South African Reserve Bank to set up a R240-billion facility for local banks to help them to meet the liquidity requirements of Basel III.

It is a sophisticated and complex reform of the banking system, one that will help the country withstand the more probable financial shocks coming our way.

We are, thanks to prudent economic management, contemplating sophisticated banking reforms. The Greeks, meanwhile, are pulling their money out of banks to stuff into mattresses and may in the future have to resort to a torn currency.


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