Greek tragedy

What does it mean for Athens, the euro and global finance

Hot news about the economic crisis in Greece, which is developing into a political crisis, continues to appear on TV screens and news agencies. However, for the financial world, the only real news is the fact that the financial system of one of the member countries of the European Union, which is also part of the euro zone, was in a pre-default state. Everything else is painfully familiar from pictures from the life of developing economies and countries: the irresponsible inflation of budget expenditures, the inability to collect taxes into the budget to cover them, the build-up of public debt, and as a result - no one anymore believes in the ability of the Greek government to service this debt, arose direct threat of country default on sovereign debt.

Scenarios for the development of events in the near future are quite predictable. One can imagine the provision of urgent financial assistance from other EU countries, both members of the eurozone and those outside it, on the same conditions as they apply to states such as Hungary, Latvia, Lithuania. The patient is told to “heal yourself.”

The Greek government has already faced the fact that the condition for external assistance was the requirement to reduce budget expenditures, including social ones, and increase tax collection. Only then can it count on restructuring its debt. The form of such restructuring is a matter of financial technology. For example, there may be an issue of new bonds that will be purchased by EU intergovernmental agencies or commercial banks with state participation in capital. You can ask the International Monetary Fund for help. The old debt will be partially repaid, and negotiations will continue. However, if the implementation of the budget recovery program fails, there will simply be no new loans.

Let's imagine this dramatic turn. The Greek government may be forced to default. Will this mean the collapse of the euro?

From my point of view, the answer is clear - no, the project of the euro as a new reserve currency of global importance will continue. Of course, the “Greek tragedy” will cost cash holders in euros in bank accounts or in cash. The exchange rate against the US dollar will fall. But a little time will pass, and it will again become clear that the euro is the national currency for Germany and France. Behind the euro is the power of these two economies, as well as the neighboring countries of Benelux, Central Europe, Southern Europe, and Northern Europe. The economic essence of this monetary unit will not change as a result of crisis events.

The euro connects all EU countries with a fixed rate - the Austrian euro and the German euro 1 to 1. And so on between all pairs of countries. In this regard, the Latvian lat differs from the euro in the technical procedure for issuing cash, the rules of transactions between banks, and the conversion factor. And, of course, the degree of trust in this currency from third countries.

What awaits the Greek economy in the event of a default on the national debt? First, a return to the drachma as the national currency. Secondly, the most difficult negotiations with all holders of government obligations in euros, which will turn into external debt in foreign currency for the Greeks, on the restructuring of debt obligations. Thirdly, the same hard economic and political work of getting your finances in order. Restoring trust in the drachma, in the political leadership of the country, and preventing catastrophic inflation of the drachma - the tasks will be extremely difficult. But many countries in the world have solved similar problems in the past, are solving today and will solve tomorrow.

The financial world continues to fear a spreading sovereign debt crisis. In 2010, the ratio of government budget deficits as a percentage of the GDP of EU countries looks quite dramatic: Ireland - 14.7%, Great Britain - 12.9%, Latvia - 12.3%, Greece - 12.2%, Spain -- 10.1%. For the rest, this level is below 10%. The average deficit in the eurozone is 6.9%.

However, in the US this figure is 13%. The government debt to GDP ratio in the US is 93.6%, while the eurozone average is 84%. The authorities of the USA and Great Britain flexibly take advantage of the fact that their national currencies are traditionally revered in the world as reserve currencies. The governments of these two countries and Japan are implementing a policy of quantitative easing, i.e. allow themselves to allow what has always been prohibited - the purchase of government bonds by their central banks.

In essence, this is the monetization of debt, fraught with inflation. If the governments of Hungary (debt to GDP is 79.8%) or Latvia (48.6%) allowed themselves to take such actions, then inflation of the forint and lat would occur immediately. The same awaits the modern Greek drachma, if it is destined to appear. But the world's confidence in the dollar, yen, and pound sterling has not yet been undermined; in these countries, prices are not rising, but rather falling (deflation instead of inflation). Is such trust limitless? Hardly. The fall in the exchange rate of the British pound to all leading freely convertible currencies over the past year and a half clearly demonstrates these limits. However, maintaining its own currency and its free exchange without fixing the exchange rate gives the British financial system a degree of flexibility that prevents the “Shakespearean tragedy” of default on the national debt. But inflation of the pound sterling and a further weakening of the exchange rate of the euro in the very near future can be confidently predicted.

Sergey DUBININ, member of the board of directors of VTB Capital