Coming Soon to a market near you – Lehman II

 An alternate view on Greece currency crisis and how Greece should think differently.

 

Greece should be saying “Screw Eurozone, It’s all over” akin to what Lady Gaga tweeted after her concert in Delhi (Screw Hollywood, its all Bollywood). Greece is at the threshold of a major economic disaster. Not that a sovereign default will happen for the first time in the world, but it’s the complexity of a single currency union and the resultant lack of consensus that is making the markets and investors nervous. Greece is caught between a rock and a hard place. It needs help from Eurozone partners to evade sovereign default and keep its credit lines open. At the same time the conditions set forth by Eurozone are pushing its economy further downhill in terms of competitiveness and long term growth and stability.

Greece at the moment looks like any other common person who has incurred more debt than he or she can repay considering his or her current income and assets. A default is thus very likely. Greece is looking towards its partners to bail it out of this situation by lending money; much like any other common man would do in such a situation. However, the problem is that its partners are enforcing stiff conditions on Greece, in terms of controlled spending, cut in jobs and continuous monitoring on measurable basis of austerity measures to help it out of this mess. Once Greece accepts the austerity measures and cut spending and jobs, its growth will further fall and its ability to repay the debt will diminish. A bailout from partners would no doubt avoid a global economic catastrophe and give Greece relief in the short and medium term. But it would be stressed again when the loans from its partners become due. 

An alternate, which Greece should be considering at this stage is a full blown sovereign default. It sound outrageous and unethically in the first place, but if I am Greece this sound like a long term solution to my problems of low growth, unemployment and balance of payment situation. Lets consider what will happen if Greece goes into a full blown sovereign default. If Greece defaults, outside the preview of what is being proposed by Eurozone, it would be forced to exit Euro and there may be a bank run on its banks and financial institutions. Its currency will devalue and local businesses will face bankruptcy. It will also import high inflation as currently Greece is a net importer.

But on the other side because of a devalued currency its competitiveness will increase and it will slowly start to be an attractive market for cheap manufacturing in the Eurozone. Its long term prospects, if seen from a 10-15 years perspective, may be healthier than if it sticks to the austerity conditions as a precondition to staying inside the Eurozone. It can also consider setting up preferential zones for emerging market companies to set up businesses and provide easy and cheap access to labor and infrastructure. Since the emerging market currency would buy more of Greece devalued currency, it would indeed be attractive to set up business in Greece. 

Greece needs to evaluate the pros of cons of being in the Euro currency versus an exit from Euro and having its own currency. At this stage the long term prospects needs to be balanced with the immediate and medium term prospects and consequences. A short sighted vision at this stage might lead to a permanent defect which would be difficult to correct later.

No doubt a sovereign default would wreck havoc on a global scale. But then some other countries (particularly Thailand and Argentina) have been in similar circumstances and they have only come out stronger thanks to their independent currency and fiscal/ monetary policy. Greece should take a cue from India too. In 1991 India was at the verge of a sovereign default. But devaluation of its currency coupled with structural reforms turned the table and today India is one of the more stable and better managed countries embarking on a high growth trajectory.

As Lady Gaga says, Screw Hollywood, it’s all Bollywood; Greece too should be saying Screw Eurozone, it’s all over.