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Dire Consequences should Greece Exit the Euro Zone

What many missed on the controversial and multiply denied DER SPIEGEL article claiming Greece was about to exit the Euro Zone, is the part referring to German Finance Minister Wolfgang Schaeuble’s report on “possible dire consequences” on the European economy should Athens drop the Euro”. The report or better say the internal paper was prepared by the experts of the German Finance Ministry, who according to SPIEGEL went to Luxembourg to convince Greece not to exit the Euro Zone…

Let’s see what would be the consequences

For Greece

Considerable devaluation of the new -Greek- domestic currency against the euro. Currency could lose 50% of its value, leading to drastic increase of national debt. 

Schäuble’s staff have calculated that Greece’s national deficit would rise to 200 percent of gross domestic product after such a devaluation.

“A debt restructuring would be inevitable,” his experts warn in the paper.

In other words: Greece would go bankrupt.

It remains unclear whether it would even be legally possible for Greece to depart from the euro zone. Legal experts believe it would also be necessary for the country to split from the European Union entirely in order to abandon the common currency. At the same time, it is questionable whether other members of the currency union would actually refuse to accept a unilateral exit from the euro zone by the government in Athens.

For Greece and Euro Zone

The currency conversion would lead to capital flight,” Schaeuble’s experts write. And Greece might see itself as forced to implement controls on the transfer of capital to stop the flight of funds out of the country.

This could not be reconciled with the fundamental freedoms instilled in the European internal market.In aaddition, the country would also be cut off from capital markets for years to come.

 The withdrawal of a country from the common currency union would seriously damage faith in the functioning of the euro zone.

 International investors would be forced to consider the possibility that further euro-zone members could withdraw in the future. “That would lead to contagion in the euro zone,” the paper continues.

For Banks

The implications for the banking sector would be serious, for banks in and outside Greece.

 The change in currency would consume the entire capital base of the banking system and the country’s banks would be abruptly insolvent.

“Credit institutions in Germany and elsewhere would be confronted with considerable losses on their outstanding debts,” the paper reads.

The European Central Bank (ECB) would also feel the effects as it would be forced write down a significant portion of its claims as irrecoverable. The ECB also owns large amounts of Greek state bonds; estimated total worth at least €40 billion ($58 billion).

Given its 27 percent share of ECB capital, Germany would bear the majority of the losses.

 In short, a Greek withdrawal from the euro zone and an ensuing national default would be expensive for euro-zone countries and their taxpayers. Together with the International Monetary Fund, the EU member states have already pledged €110 billion ($159.5 billion) in aid to Athens — half of which has already been paid out.

“Should the country become insolvent, euro-zone countries would have to renounce a portion of their claims” the German Finance Ministry internal paper says.

Full Article DER SPIEGEL

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