Yanis Varoufakis, Finance Minister of Greece. Demotix/Wassilis Aswestopoulos. All rights reserved. In the current poker game between Greece and the EU, Tony Curzon Price thinks that Syriza holds a winning hand. His argument is that if the EU does not agree to Syriza’s demands, Greece can choose to leave the Euro, redenominate its debts into a new devalued currency, impose currency controls and regain control of its own economy. A Greek exit would force losses onto German banks, while Greece itself would recover as Iceland did.
In 2010, Greece could indeed have left the Euro as Curzon Price suggests. Redenomination into a new currency would have been regarded as default by the international community, so it would have been shut out of markets. Greece at the time had a sizeable primary deficit, so would have been forced either to impose sharp cuts to public spending or print money. Greece would have suffered a severe recession coupled with high inflation. It would have been very painful. But it might have been short-lived. And as Curzon Price points out, Greek default and exit in 2010 would have forced losses onto German and French banks. The consequences for the European banking system would have been severe.
But this is not the situation now. European banks have little exposure to Greek debt. The majority of it is held by Eurozone institutions, particularly the European Financial Stability Facility (EFSF). So it is not banks that would take losses if Greece were to leave the Eurozone, it is sovereigns. Not just the sovereigns whose banks lent to Greece in the first place, but all EU member states, including those such as Latvia that are considerably poorer than Greece. The ECB would also take losses on its holdings of Greek bonds. And the IMF, which like the EFSF is funded by its member states – including many that are much poorer than Greece – also would take losses. So a Greek default now would be ethically problematic.
