A Disorderly Exit


Things have got very serious.  Greek banks are haemorrhaging as withdrawals escalate and Switzerland has announced restrictions on money flows if Greece leaves the EZ.  In the United Kingdom there has been an increase in UK citizenship applications by Greeks who have been residing in the British Isles for over five years.  IMF chief Christine Lagarde showed her impatience with Greek politicians by saying that she is more concerned about the fate of children in Africa than that of Greeks struggling with the crisis and appealed to the Greek public to finally give up tax dodging.  Another EU summit took place, the end of which saw the release of fewer soothing comuniqués than usual.   It has generally been accepted that what has been agreed should prevail,  namely that no reforms equals no further financing.   Meanwhile in forex land, the euro fell to a record low agains the dollar, at 1.25.  In recent years the lowest rate was 1.20 dollars to the euro.  Caught in the flak once again are the so called emerging currencies – hence the drop in the value of the zloty vis a vis both the euro and the dollar.  The market has prepared for the worst case scenario, i.e. Greece leaves the euro whether it wants to or not.


The controlled exit option is unlikely because the approval of the Greek government would be required.  Even the most populist government will try to avoid this solution.  The disorderly exit is the most likely and would mean cutting off the country from external financing and the introduction of a new currency.  As I wrote last August :   "the disorderly exit option,  although unlikely,  is still possible.  Let us imagine a situation where one of the threatened countries in the EZ suspends implementation of the reform plan agreed with the  European Commission and the IMF. 


This would lead to the automatic freezing of liquidity which means it would no longer be possible to meet current financial obligations … A disorderly exit from the EZ is paradoxically easier and more likely than the orderly one.  A disorderly exit would require the flotation of a new currency together with the establishment of an exchange rate as well as the preparation of the necessary institutional infrastructure".


This is the threat which looms.  Centre stage is Greece and the party likely to suspend reforms is Syriza.  The flight of savings ratchets up the tension a couple of notches and could lead in no time to a run on the banks.  In order to prevent this the european monetary authorities must be ready at any moment to react.  This is undoubtedly the most real and urgent threat to the system.  The EU and its individual member states are preparing emergency plans in the case of a disorderly exit.  According to polls published recently in the Financial Times, the least prepared countries are those of central and eastern Europe.  Most probably because they consider that their direct connection with Greece is negligible and that in the majority of cases they have their own currencies and are less concerned with the euro’s problems than those who use it on a daily basis.  Nothing could be more misguided as a disorderly exit will lead to the kind of market panic which would dwarf even that seen after the collapse of Lehman.  All financial commitments would have to be converted to the new currency which in most cases would mean that creditors would not get paid.  And taking into consideration that the scale of interdependence is not fully known,  the only safe haven would be the ECB.  However in the case of not just Greek but unfortunately also Portuguese and Spanish businesses, there would be a total financial gridlock where everyone would fear a repeat of the Greek scenario.   This may even indirectly affect Polish businesses, not only because of the risk of devaluation but above all because of the paralysis of the european financial system.   Anyone who might be affected should have a plan B.  And the role of European and Greek leaders is to prevent things getting to that point. 


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