Greece Outcomes Range From Euro to Parallel Currency: Scenarios

Below are some frequently asked-questions on the future of Greece as it prepares for second elections on June 17 and confronts the possibility of exiting the euro.

How have markets reacted since the May 6 election?
     Greece’s benchmark stock index has fallen about 27 percent
since the election, compared with a 7 percent decline by the
Stoxx Europe 600 Index. Speculation that a country will leave
the euro-area have increased. Odds on a euro breakup by the end
of this year rose to 39.4 percent as of June 1 from 22 percent
on May 4, data compiled by Dublin-based Intrade show. The odds
of that happening by the end of 2013 have risen to 57.6 percent.

What will happen immediately after the results are known?
     The Greek constitution says that when a coalition can’t be
formed, the president must broker a government of national
unity, and if that can’t be done, new elections must be held.
This is what happened after the May 6 election and the same
pattern could repeat itself if there isn’t a clear result on
June 17.

What are the possible outcomes of the vote?
Credit Suisse AG says these are the three main outcomes:
     -- A pro-euro coalition (40 percent probability). This
could result in a successful renegotiation of parts of the
EU/IMF program and a continuation of funding.
     -- An anti-bailout coalition (40 percent probability): This
could lead to a euro exit, depending on how confrontational the
government wishes to be in its negotiations. An approach that
involves cancelling the bailout terms could lead to a departure
from the currency.
     -- A stalemate (20 percent probability): Under pressure
from international partners, this could result in a unity
government and an attempt to renegotiate the bailout. Even if a
renegotiation was successful, implementation of reforms would be

What do the Greek people want?
     A poll on May 31 showed a vote would produce roughly the
same pattern as in the first election: New Democracy had 23.9
percent support, while Syriza had 22.5 percent and Socialist
Pasok had 12.6 percent, according to a survey conducted May
29-30 and published on the website of Athens-based Real News.
The margin of error was 2.6 percentage points.
     The poll showed that 49.6 percent of respondents said they
disagreed with Greece keeping the euro if all the austerity
measures linked to bailouts had to be implemented, compared with
42.2 percent who said Greece should keep the euro “at all

What happens after a government is formed?
Goldman Sachs Group Inc. sees three possibilities:
     -- Muddling through (most likely): Greece seeks to stay in
the euro but doesn’t agree to unconditionally implement the
reform program. The most likely consequence is that the Troika
ceases payments, though banks continue to receive European
Central Bank support unless a political decision is made to
withdraw central bank facilities. Greek membership in the euro
depends on its ability to adjust to new incentives as the threat
of exclusion from the rest of the bloc gains credibility.
     -- Slow exit (next-most likely): Greece is excluded from
the euro area after the remaining members are given time to
build firewalls against the shock, such as deposit guarantees
and liquidity injections by the ECB. While there isn’t a legal
mechanism for exclusion, it could be done in practice by cutting
Greek banks off from ECB facilities and payments systems. For
the rest of the euro area, the firewalls are unlikely to be
robust enough to deal with the impact of the Greek exit, while
there may be fallout on markets because of the precedent that
euro membership can be rescinded, Goldman says.
     -- Fast exit (least likely): Greece abandons the euro and
introduces a new currency. A “sudden and abrupt” exit wouldn’t
give other nations time to prepare and an insufficient firewall
could mean an unravelling of the euro area.

How much time would Greece have to arrange its affairs were it
to choose a fast exit?
     Assuming Greece were to make the decision at the end of
foreign currency trading in New York on a Friday, it might have
about 46 hours to get its affairs in order before the opening of
trading in Wellington, New Zealand on the Monday. In that time,
officials might have to manage a potential sovereign default,
plan a new currency, formulate a plan to recapitalize banks,
stem the outflow of capital and seek a way to pay bills once the
bailout lifeline is cut, economists say.

What might a new Greek currency be worth?
     Nomura International says its initial estimates suggest
that a new drachma would plunge between 50 percent and 60
     National Bank of Greece SA, the country’s biggest bank,
says the new currency could plunge about 65 percent, wiping at
least 55 percent from per capita income in euro terms. The
recession would deepen by about 22 percent at stable prices,
adding to the 14 percent recorded in the 2009 to 2011 period, it
said. Unemployment would jump to 34 percent and inflation rise
to above 30 percent, pushed up by the higher cost of imported
goods, National Bank of Greece says.

Could this turn out as bad as what followed the 2008 collapse of
Lehman Brothers Holdings Inc.?
     Much will depend on the ability of the euro-area’s policy
makers to quarantine Greece by increasing the size of its rescue
funds, reinforcing banks and ensuring liquidity. If they don’t
do enough then “all hell breaks loose,” says Barry
Eichengreen, a professor at the University of California,
Berkeley, and author of a 2006 history of the European economy.
     Bank of America Merrill Lynch strategists estimate the
euro-region’s gross domestic product would contract at least 4
percent in the recession that follows a Greek exit, similar to
the decline after Lehman’s bankruptcy.

What might officials do to prevent the euro region unraveling?
     Morgan Stanley says there is a 35 percent chance of a euro-
region breakup by the end of next year and lists five possible
policy responses to limit the fallout.

In the near term:
     -- Aggressive ECB policy action. Potential measures include
more long-term refinancing operations with longer maturities;
relaxing the collateral guidelines on national central banks
running Emergency Liquidity Assistance; large-scale purchases of
private and government bonds.
     -- Recapitalization of banks via the European Financial
Stability Facility or European Stability Mechanism.

In the longer term:
    -- The creation of a federal deposit guarantee scheme.
    -- Fiscal union.
    -- The ECB becomes official lender of last resort for a
federal Europe.

Are there alternatives to a full Greek exit?
     Deutsche Bank AG’s Thomas Mayer said in a May 18 note that
the Troika could stop payments to Greece if it refuses to
implement the program. A Greek parallel currency to the euro,
which Mayer called a “Geuro,” could emerge as the government
issues IoUs to meet payment obligations.
     That would allow Greece to devalue without formally exiting
Europe’s monetary union and “keep the door open to a future
return to the euro,” said Mayer, who used to be chief economist
to the bank and is now a senior adviser.

What do European leaders want?
     Euro region officials say they want to keep Greece in the
euro, though policy makers say that the country can’t be forced
to stay if voters reject austerity measures. German Finance
Minister Wolfgang Schaeuble told the Rheinische Post in an
interview published May 11 that the euro region would be able to
cope better with a Greek exit now than a year ago.
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