Euro without Greece?

In March it seemed like the world was still all right for Athens. The second tranche of the bailout package had been greenlighted by the EU. A historic haircut on debt had been passed. Even rating agencies seemed to take a more favorable perspective on Athens.

But the calm didn't last for long. Last Sunday's parliamentary elections are putting politicians up against a virtually unsolvable challenge. They are to form a government that would have to abandon the EU's strict austerity measures but still manage to remain within the eurozone.

Warning shots for Athens

The rest of the EU has left little doubt that there only will be more help for Greece if it continues along the path of austerity. The EFSF rescue fund has already fired a first warning shot by holding back the current tranche of 5 billion euros.

It seems most likely that June will see Greece holding new elections yet again. But by the end of June, the country will need a further 30 billion euros to stay afloat. In other words: Greeks have no other choice but to give their vote to one of the two traditional main parties who are held responsible for having maneuvered Greece to the verge of the abyss. Should voters stick with what they voted last Sunday, the worst-case scenario of the country defaulting might soon be all too real.

A chaotic course

Greece going bankrupt would throw the country into utter economic chaos. The government would not be able to pay public servants, the water and electricity supply would break down and companies would go bankrupt.

Athens also would have to stop servicing its debts. This would primarily affect Greek banks, because they naturally hold most of the Greek bonds.

Without government bonds they would have no more securities for the European Central Bank to refinance themselves. Moreover, "Greek banks are likely to experience a run on their deposits," Christian Schulz of Berenberg Bank told DW. "Greek investors are likely to try anything to pull their money out of the banks and to get it out of the country if possible."

All this would drive the banking sector into ruin and hit other banks in Europe. However, experts predict that the impact on banks outside of Greece would be limited. After cutting the debt they would only have about 40 billion euros of Greek bonds on their books.

Eurozone prepared for the worst case

Politicians fear a contagion spreading to other euro countries less and less. Budget expert Otto Fricke of the pro-market Free Democratic Party told the "Saarbrücker Zeitung" newspaper: "The specter of a disorderly bankruptcy has lost its terror, because the eurozone countries have done nothing else over the last few months besides preparing for such a case."

The willingness of other countries to free the Greeks once more from the chaos that is generally held to be their own fault is also limited.

Even so, the other euro countries are not yet passively standing by. They would probably try to sweeten the Greeks' withdraw from the monetary union with a hefty injection of cash for their banks.

Old, new drachma

The next logical step for Athens would be to introduce the old currency, the drachma, again. Experts say the new drachma would be devalued against the euro by 50 percent. Although this would make Greek exports more competitive at a stroke, it would not make the situation any easier for the Greeks, economist Jürgen Matthes told DW. That's because the country's liabilities would continue to be denominated in euros, which would then have to be serviced with the "soft" drachma.

Another haircut would follow. But such a step would also not be excluded under the existing austerity-based rescue plan.

Tangible losses for the Bundesbank

A Greek exit from the eurozone would bring with it real losses for the Bundesbank, because it would be settled in cash in Target II, the much-discussed payment system for central banks. So far, the central bank in Athens has accumulated liabilities to the ECB of around 110 billion euros within this system. Added to this are the Greek bonds purchased since May 2010 by the ECB, estimated to be worth 50 billion euros.

The Bundesbank's share would be about 40 billion euros, which it would have to write off in the worst-case scenario - not a small amount, but manageable for the robust German federal budget.

Fitch boss believes risk is acceptable

Paul Taylor, the new head of the ratings agency Fitch, believes the risk of a Greek departure from the eurozone to be acceptable. In an interview with Spiegel Online, he said, "Greece's exit does not mean the end of the euro. Germany in particular has a fundamental interest in retaining the common currency."

Some economists hope for a storm in the euro area to wash away problems. Almost all experts agree that it was premature or wrong to grant the Greeks entry to the monetary union back in 2000. US economist Kenneth Rogoff considers Greece a developing country. He told the news magazine "Der Spiegel" that "The assumption that the euro could make the development gap disappear in a hurry was madness."

Author: Zhang Danhong / ai
Editor: Simon Bone