We all know how celebrity media love to jump on rumours, exaggerate the truth and spin a rumour to an extreme conclusion. (How many times have you heard that Jennifer Aniston is pregnant? The poor woman can't even enjoy an after-dinner paunch without the paparazzi declaring a baby bump.)
The same can be true with financial media. Journalists love a good story and alarm-ringing bad news often makes the best headlines. So when you hear all the "what if" stories surrounding Greece these days, it can be tough to know what is realistic and what is crazy-talk. [More: The true North strong and free: How to take advantage of a strong Canadian dollar]
To help you sort your Grexits from your Geuros, read on…
How did things get so bad for Greece?
Greece has been in a recession for five years. Unemployment is nearly 22% and over half of its young people (ages 15-24) don't have jobs. Economists point to systemic problems that make the Greek economy unsustainable, such as an early retirement age of 50, a lax system of tax collection and convoluted rules for business. The biggest challenge however, has been making the whopping payments on government debt. As German chancellor Angela Merkel has warned Greece: "In the long run, you can't live beyond your means."
How is Greece surviving now?
Greece currently receives regular payments of financial support from a "troika" of international lenders: the International Monetary Fund (IMF), the European Union (EU) and the European Central Bank (ECB). Of course, there is no such thing as free money. In order to qualify for the bail-out money, Greece had to agree to some tough love austerity measures, such as severe cuts to government services and higher taxes on its citizens. [More: Safe haven investing: Is any investment a sure thing anymore?]
How are Greeks reacting to their economic crisis?
Many people in Greece are suffering under the austerity measures, especially those who rely on healthcare and other government services. In the recent election, the government that made the bail-out deal with the troika was voted out. "Anti-austerity" candidates, who vowed to kick the troika and their austerity conditions to the curb, did not win enough seats to form government either. A new election has been scheduled for June 17.
Why do people think a Grexit is imminent?
The Greek people are frustrated, the troika is frustrated and investors are frustrated. Germany is one of the healthiest members of the eurozone and has expressed its impatience at the risk of throwing good money after bad in Greece. IMF chief Christine Lagarde has warned that the austerity measures are not negotiable. Meanwhile, Greece's ability to keep paying its lenders gets tougher every month.
So how would a Grexit help matters?
If Greece decides it has had it with the austerity program, that will mean no more infusions of cash from the troika of international lenders. Greece would need to figure out a way to keep paying its creditors and keep currency circulating among its population. The most obvious solution would be to start printing its own money. This would mean leaving the euro and restoring its former currency, the Greek drachma. [More: When markets say 'meh': What really rocks the markets]
How can they just print money? Would it be worth anything?
The new drachma would be worth a lot less than the euro, maybe 60% less according to some experts. But a low-value currency isn't totally a bad thing and could give the country a lot more flexibility to get solvent again. For example, Greeks would find it tough to afford imported goods, but they would be motivated to spend the money they earn within their home country. Foreigners would be eager to buy Greek property and goods at a discount and tourism would be revived. Both of these would create jobs and help get the economy growing again.
What is this about a geuro? Is that like a gyro?
Some experts have suggested that Greece has a third option. If it rejects the austerity measures and bailout money, it doesn't have to turn to the drachma. The country could issue some kind of IOUs to its creditors, promising to pay euros at a later date. These IOUs would end up becoming a form of currency and their value would be tied to the value of euros (for example, maybe two-to-one). Economists are calling this idea of a parallel currency 'the Geuro'.
What if there is no Grexit?
If Greece hangs in there, succumbs to the austerity measures and pays its bills, the markets will remain relatively calm in the short-term, although somewhat subdued — like we're all waiting for the next crisis to happen. This 'European effect' is already taking a toll on global companies who have seen their product demand drop off and profit margins shrink as European customers hold off on spending. [More: Canaries of the crisis: 4 women who warned the world about a financial meltdown]
Most analysts agree that in the long term, Greece will not be able to get out of its depression and burden of debt without some kind of currency depreciation. As long as Greece remains on troika-supplied life support, there's a good chance the 'European effect' will continue to hang over global companies and markets for a very long time.
Has there ever been a Grexit type scenario before?
During the 1990s, Argentina's peso was on par with the US dollar. The country created a mountain of debt and by 2001, it finally collapsed. The peso was detached from the US dollar and the value of pesos plummeted.
These were dark days for Argentines, who recognized that their savings would be decimated once their bank deposits were transferred to the new, less valuable pesos. Many people panicked, withdrawing their dollars and investing them overseas, until the government put a freeze on bank withdrawals. Inflation skyrocketed, since most businesses relied on imported goods. The trauma, stress and civil unrest that Argentina went through are still shocking to anyone who lived through it.
It has taken several years and a huge effort on the part of successive Argentine governments to stabilize the economy but its growth and recovery have been impressive. In 2011, Argentina's GDP growth was 8.8% (Canada's is 2.2%) and it is now one of the G-20 major economies.
Will a Grexit cause panic in the streets?
If Greece chooses to change its currency, it's the banking system we need to keep our eye on. The Swiss franc has been at sky-high levels for the past year as Greeks and other Europeans have already begun moving their savings out of local banks and into a 'safer' currency.
At the announcement of a Grexit, banks in Greece will have to be closely controlled to prevent mass withdrawal pandemonium. Europe's leaders and bankers will also want to ensure that people in Portugal, Spain and Italy do not similarly panic. Spain recently took one of its largest banks and nationalized it, giving it an extra injection of capital to prepare it for emergencies.
Will other eurozone countries be next?
Portugal is often cited as needing the same kind of tough love as Greece. Many experts think it can only survive with a cheaper currency, major debt restructuring and a chance to grow competitively again. These are different problems than those facing Italy and Spain, which are short on cash but still have relatively functioning economies. Regardless, the entire eurozone would have to be ready to support their weakest links in the event of a Grexit.
Enough about Greece, what does a Grexit mean to me?
There would likely be an immediate shock to the market on the announcement of a Grexit and what it might lead to, but most experts agree that investors need to put Greece into perspective: Greece accounts for only 2% of the eurozone GDP. It owes $70 billion mostly to German and French banks which have been preparing themselves for the possibility of Greek default for some time now; the rest of its debt (several hundreds of billions) is owed to the ECB, EU and IMF.
One TD economist suggested that a Grexit could actually strengthen global markets by giving us hope that the eurozone problems are finally being resolved.
It's a small world, after all
Global economist Nouriel Roubini recently wrote that "an orderly exit of Greece from the euro is linked to considerable economic pain. But to watch the slow and disorderly collapse of the Greek economy and society would be much worse."
If Greece decides to make a graceful Grexit, we expect all the countries in the EU and North America will stand beside it and work together to try and ease the pain and ensure an orderly transition. After all, Greece is a gorgeous country with an incredible history. The Greek people have given us everything from poetry to democracy. We all must do our part. Summer holiday in Santorini anyone?
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