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Default and its implications on the citizens and enterprises of Greece

26 September 2011 / 18:09:02  GRReporter
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In the past two years, many taboos concerning the functioning of the euro area have been denied. Among them was that the IMF can not interfere with the affairs of the euro zone or that economically powerful countries in the union can not finance their weaker counterparts in the south. Recently, it became clear that the taboo "it is not possible a Member State to leave the euro area" is about to fall too. Not only such a scenario is considered for Greece, but it is already knocking on its door apparently. The high-sounding statements from Brussels that "we will not allow Greece to default", "Greece's leaving the euro area is unthinkable", "Greece will have a positive economic growth in 2012 "(ha!) fell tones down. The Austrian Finance Minister Maria Fekter was even heard to say ten days ago that if the rescue of Greece will be expensive, it would be better let it go bankrupt.  

Now the default of the Mediterranean country is considered certain and three different scenarios for the debt crisis in Greece are considered in the public space. All three options would dramatically change the socio-economic structure of Greece and will have a direct impact on wages, pensions, social policy, banking, employment, trade and entrepreneurship in the country.

The first scenario provides a partial debt restructuring, "partial default" with the involvement of private owners of Greek government bonds. This mechanism has been enforced to a certain degree following the decisions of the summit on July 21 this year and currently is voluntary. However, there are talks that Brussels considers the options of resorting to a 50% haircut of the foreign debt in order to reduce the credit burden on the country and to begin the actual recovery of the local economy.

Ø In this case, it is expected that creditors will continue to require a reduction in minimum wages and pensions by direct cuts or indirectly by eliminating the minimum tax-free income. Overall, the public and private sectors in this case are expected to decline by about 20%. Following the austerity plan, the minimum annual tax-free income reached € 8 000 compared with € 12,000 from the period before the deepening of the crisis. Currently, the Ministry of Finance is examining the options to bring it down to € 5 000, which is lower than the statistically estimated poverty line. According to recent data, it is around € 6,200 per year.

Ø Under these conditions, deposits in the country will not be threatened and bank losses from the partial haircut of the debt on the Greek government bonds will be covered as well as the dramatic outcomes. However, while no security in the recovery process of the Greek economy is felt, the citizens will continue to doubt the future development of the crisis and the deposits will continue to outflow to foreign banks.

Ø Loans in case of partial haircut of the Greek debt will not be flourishing either. Interest rates will rise if the number of debtors unable to pay their loans increases. Loans will be unaffordable for most people due to high prices and low liquidity. The banking system will reform and priority will be given to mergers and consolidation of banks. Liquidity difficulties remain, because the capital markets will remain closed for the Greek financial institutions, and the main occupation of the banks will be the management of "bad loans" or those in the payment of which there are difficulties.

Ø In entrepreneurship, a further drop in turnover is expected because consumption will continue to decline, which will inevitably lead to a decline in the tax revenue. Many companies are expected to stop operating under these difficult economic conditions. Only the companies complying with the purchasing power of consumers and regularly paying their obligations to the state will continue to operate.  

Ø Social policy in Greece will narrow significantly and the citizens themselves will have to cover most of the previously free medicines and health services, and the lists of citizens entitled to social benefits will be revised.

Ø Greek exports will turn to new booming markets interested in local goods and their prices will be more competitive because the labour costs in the country decline.

Ø The partial default will help employment in the country in no way. It will inevitably lead to increased recession, thus deepening unemployment. The only alternative to create new jobs is considered the enforcement of the EU funds under the National Strategic Development Framework. They are an interest-free way to finance companies to provide new positions in the labour market and to allow the local economy take a breath.

The second option for the development of the Greek debt crisis being considered is controlled default, in which Greece announces suspension of payments to foreign creditors, but remains within the euro zone.

Ø Since Greece is not able to give a penny to its external creditors, there comes a time the salaries and pensions in the country to catch up with the productivity of the country. All allowances will be cut and the wages in the public and private sectors will get even. The wages will drop by 40% at least and the Greek media have noted that the salaries of new entrants to the labour market will be equal to the levels in other Balkan countries, apparently referring to Bulgaria or about € 300 per month.

Ø Banks liquidity will be at risk because the Greek government bonds will undergo a dramatic devaluation. Deposits will be drawn and the survival of financial institutions will directly depend on their ingenuity and flexibility.

Tags: EconomyMarketsDefaultDrahmaEuro zoneBanking systemSupportFinancial collapse
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