By Ruma Dubey

Once again, Greece is in news. And once again, it is news about a probable default. Who-will-blink-first kind of negotiations between Greece and the lenders – IMF, Euro banks and the Eurozone countries has once again left the country and market around the world on tenterhooks. Asian markets (barring India) are down and gold, the investment tool for uncertain times is up.

The overall perception is that these negotiations are brinksmanship politics and we are sure to hear of a deal coming through in the next few days. And then there is the second thought – would it really matter if Greece exits (Grexit)?  Greece and its economy have becomea butt of joke around Europe and people feel that it no longer matters whether or not Greece remains within the fold of the Eurozone; after all Greece represents less than 2% of its economic output. There is also a lot of frustration and an overall negative energy against Greece – why should the other hard working people in the Eurozone, who have borne the brunt of austerity and reforms, pay for a country which has paid least heed to all warnings?

This might be a growing perception but the truth is that if Greece does exit, it is bound to be messy. The first big question dogging everyone’s mind - how will Greece leave, what is the process when a country wants to quit the EU? It is not like as though one check’s out of the hotel after the stay.

Many say that if and when Greece exits, it would not come as ‘breaking news’; the leader of the country would just announce its exit.  Now going ahead, with everyone suspecting its exit, it might just sit tight, will not repay its debt and thus by becoming a defaulter, will force the other members of the EU to make a decision – whether or not they want a defaulting country in the EU.

There is another school of thought which says that the Greek Govt might confer, set an internal date for the exit and typically, on a Friday evening, after all markets are closed, will announce the date of its exit. But this news has to be top secret as it could lead to an exodus of the Euro from Greece banks and that could lead to a virtual collapse. There is already news of banks in Greece seeing huge withdrawals but there are no serpentine queues yet outside banks for withdrawal. Money fleeing the country is essentially via bank and wire transfers of HNIs and FIIs. The common man on the street is yet to panic to that extent. Rather, they do not really have a choice right now.

So then how do they ‘oust’ this defaulting country?  When the Euro was created in 1992, no mechanism was put in place for exit from EU.  In 2007, a new treaty was added to allow the option of exiting the EU. Thus to exit from Euro, it will have to exit from EU as per the treaty. There is no provision in the EU treaties for exiting the euro zone without also dropping out of the broader 27-country bloc.  But this will again mean an exit from the EU and not the Eurozone as there is simply no law in place to do that.  Policy makers in EU are neither in a hurry to put in place the process of exit, nor do they want to make it easy as they fear it could lead to an exodus with many more beleaguered nations wanting to opt out. Yes, Grexit would show the world that Eurozone membership is not irreversible!

But if Greece plans an exit, what happens to the currency? The Euro will have to go and the drachma will have to printed and that could take as much as four months. And people with Euro’s will be given a conversion rate, like one drachma for every two Euro held or something similar. Once the conversion rate is fixed, the exchange rate will be allowed to dictate the rate of drachma, which could crash immediately.

And if this is the kind of upheaval we are looking at, banks would also need to be protected to ensure they do not crumble under withdrawal pressures. Capital controls, recapitalization and nationalization of the banks will most likely come in. This exit just as being not easy, will also not be cheap. The IMF which had presented a paper on the exit of Greece in 2012 stated that it will be extremely expensive, pegging it at around 1 trillion Euro’s. And when it comes to issues about the Greek debt, it will be the most contentious and sticky part. The domestic debt could get converted into the drachma but external debt, money repayable to bondholders and more importantly, the money owed by Greece to the ECB would all need restructuring and renegotiations. And after the exit, Greece would find it nearly impossible to get money. The only positive is that Greece will become extremely cheap for the outsiders. Though importing fuel and other necessities might become very expensive, exports would be cheap and for the German’ Greece might emerge as the best, cheapest holiday destination for vacationing. Companies with JVs with Greek companies might also be having sleepless nights.

All in all, the exit will be bad news for the Greek and all around. But the bigger worry is that if Greek exits, will others like Portugal, Italy and others also line up for an exit? Greece is too small a country and economy to affect the entire EU but the possible exodus of others is probably the biggest fear. The beating down of confidence would be the real contagion. 

For India, being globally linked up, this will cause a lot of pain. The EU crisis will take longer to dissipate and given our own macroeconomic issues, it will only keep the economy further depressed.

The ruins of Parthenon in Greece look real, very real now.