SLATE. All you wanted to know about: Grexit bl-premium-article-image

Updated - January 24, 2018 at 03:16 PM.

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Old fears have come back to haunt Greece again. Talks of ‘Grexit’ are doing the rounds. And with the radical left Syriza party set to form the government in Greece, these fears seem more real than imaginary. The party has promised to roll back the tough austerity measures imposed on Greece since 2010 and wants to negotiate a debt write-down with international creditors. But are these promises easy to keep? Not very. Hence the fear that the new Greek government will be at logger-heads with Eurozone countries, ultimately forcing a ‘grexit’.

What is it?

‘Grexit’, a term coined by Citi economists Willem Buiter and Ebrahim Rahbari, simply refers to the possibility of Greece exiting the Eurozone and giving up the euro as its currency. If that happens, Greece would no longer be bound by the austerity measures — massive cuts in public spending — imposed on it by the European Central Bank and the IMF in the aftermath of the Greek debt crisis of 2010. How the Greece government will fund larger public spending, once it defies creditors, is however a moot point.

If Grexit materialises, Greece would go back to using the drachma, its own independent currency, as it did before it joined the Eurozone. But given the mess Greece is in, the drachma, once revived, may depreciate. This would make Greek goods cheaper and could help boost the country’s exports. But it’s not all as simple as it sounds.

Why is it important?

A Grexit will trigger other far reaching consequences, not just for Greece, but for the rest of Europe too. Already, the fears of a looming Grexit have spooked markets.

One of the biggest fears for Europe from a Grexit, if it happens is that it could unravel the idea of the European Union. Other troubled Eurozone economies such as Portugal, Spain and Italy too may be tempted to follow suit.

For Greece, the very process of transitioning to the drachma may not be easy. How international investors or creditors will view the currency without the backing of the Eurozone is a worry. It is being suggested that Grexit be planned secretly and announced on a public holiday to avoid a run on banks! Once the announcement is made, Greece may also have to slap capital controls to prevent flight of foreign investors. A rapidly depreciating currency would make imports costlier for the Greeks, fuelling inflation. It will also have to deal with loss of business confidence with grave consequences for the economy.

For international creditors including Germany, Grexit would mean having to take a haircut on Greek bonds they hold. The debt they hold would get converted from euros to the devalued drachma. Even worse, the debt may not even be serviced by Greece.

Why should I care?

If you’re an investor in stock markets, a weakening euro should have you worrying about all those Indian companies that have a European exposure. Indian software giants with euro revenues have already seen a few percentage points shaved off their sales and profits in this quarter, due to the shaky Euro. But as a layman, if you’ve been dying to holiday in Greece, you might just be able to do that at lower costs than before.

The bottomline

Grexit could be a Greek tragedy for financial markets, but those who are planning a trip to Greece may have reason to cheer.

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Published on January 26, 2015 16:19