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“Grexit is NOT an option for Greece”

By Dr Nikolaos Georgikopoulos - Visiting Research Professor at NYU (Stern School of Business).

Dr Nikolaos Georgikopoulos, visiting research Professor at New York University - Stern Business School & senior research fellow at KEPE.  Dr Nikolaos Georgikopoulos is a visiting research Professor at New York University - Stern School of Business since August 2012 and a senior research fellow in financial economics at the Centre of Planning and Economic Research (KEPE) in Athens since 2007. He was the coordinator of four research projects assigned to KEPE by the Greek state. Additionally, he was in charge of the first two research projects commissioned at KEPE by two international companies. At present, he is coordinating two joint research projects at KEPE, the first one in collaboration with the Stern School of Business at New York University and the second in collaboration with the STORM research centre at London Metropolitan University.  He holds a Ph.D. in Finance, from the Business School at Imperial College London. His first postgraduate degree, Master of Science in Mathematical Finance, was obtained from the University of Oxford, UK. He has also obtained a Diploma in Quantitative Finance from the Centre for Quantitative Finance at Imperial College London. He received his undergraduate degree, B.Sc. (Honours) in Mathematics, from the Aristotle University of Thessaloniki, Greece.  He has published research papers in the field of mathematical modelling, finance and risk management. He wrote many articles in widely circulated economic and financial magazines and newspapers, regarding the current financial crisis and the Greek banking system. He co-authored three books in shipping, market competition and government bond yields spreads. He was a main speaker and/or participated in roundtables in many international and Greek financial conferences.

1. What practically means returning to the drachma;

Leaving the Euro are zone will have a detrimental outcome both for the Greek households and for the Greek economy. Households will be able to obtain some necessary goods and services which will be domestically produced while electricity charges will go up. The households will not be able to obtain easily imported goods such as TV's laptops, cell phones, cars etc. Corporations would struggle to survive unless they change their model, i.e. base their production and services on domestic raw materials.

2. What will be the consequences in the return to the drachma; (negative / positive)

The negative consequences of leaving the common currency would be a sharp devaluation as the new currency would have to represent the level of strength in the economy, which in the Greek case is very weak. In addition, the negotiating power of Greece will be reduced, as it will no longer be a member of a strong currency union alongside richer and more developed EU countries. The stability in the financial system may be hampered and the freedom in movement of capital and labour will be constrained.
The positive consequences are that this would increase competitiveness in the economy, through the strengthening of the domestic production and services, which in the longer run will enhance exports.

3. Normally, there will be a transitional period for Greece to go from euro to drachmas. How long it will last? How can this be achieved?

This transitional period is estimated between 5-6 weeks, in order to ensure that the new currency in circulation will be disbursed to the whole economy. The only way to ensure this is to introduce the drachma alongside euro as a parallel currency in order to give time both for the banking sector, the households and the wider economy to adjust.

4. What about the banks?

This is a critical issue. On one hand, the answer may be simple by allowing the Bank of Greece to print drachmas in order to recapitalize the banking sector and slowly thereafter banks should translate their euro-denominated accounts to drachma-denominated accounts. Nevertheless, a deeper analysis would show that by following the aforementioned development banks run the risks of being "state" banks. A better alternative for the longer term viability would be to separate the Greek State from the banks. Banks could be recapitalised by the ESM, which will prompt them for a bail-in and will be their sole owner. Banks maintain their private characteristics as far as their strategic issues are concerned, despite the fact that their operations will be conducted with the drachma currency. Being foreign banks, there will not be allowed to provide funding to the Government through the purchase of Government bonds and Treasury Bills.

5. How much will be the new currency depreciated?

Estimations vary widely but it is expected that the final depreciation will be in the range of 50%-60%, although this will happen within a period of several weeks. Initially the exchange rate will be set at 1-1 but immediately thereafter, frustrated depositors will convert the drachmas into euros pushing the value of the new currency down.

6. Will there be a change in price in basic commodities?

If the Greek economy had a wider production base on some essentials, then price would not be affected and it would even decrease in the longer run. Unfortunately, the Greek economy imports not only the raw elements and materials but also some semi-finished products, i.e. the packing for milk. Therefore, the price of the final product will only be affected upwards.

7. What will change in the daily lives of ordinary people?

The lives of the ordinary people would be directly affected as even some daily products currently available at supermarkets will be scarce to find. This will cover not only the range of the food chain (milk and oil production will also be affected due to the unavailability of imported packages) but also the daily cleaners used in washing machines and/or washing by hand which will make the ordinary life problematic.

8. Can the aforementioned be prevented through an agreement? Are you optimistic that eventually a compromise will be reached?

The Greek economy is in a very difficult situation, Greek entrepreneurial activity is stalled, tourism is suffering due to uncertainty and the banking system is shut and it is not yet certain under which conditions it will be reopen. Still, a compromise now could prevent an even worse situation of the economy going down to ruins and a banking system shuttered by the lack of liquidity where a sudden restructuring and bail-in would be the only option for it to restart. I am very moderately optimism, based on the fact that during the last hours, the Greek PM appears more concessionary but the probability for an "accident" has significantly increased after the referendum. This accident could be triggered by a German reluctance to accept the Greek proposal, especially if it is not properly organised or by Greece itself if the final proposal does not have a clause about Greek debt restructuring.

9. What happens now?

Greece made its choice to stay in the Eurozone during the last national elections. Now the rest of Europe -and, notably, Germany- needs to make a choice to help Greece to get back on track by regaining sustainable growth by permanently addressing its financial needs and its debt burden. At this stage, a Political Solution is urgently needed. Although, this time the solution should be Greek in origin but European in reach.

In this respect, both sides should grasp this opportunity to come to an agreement that would alleviate Greece's short-term acute liquidity needs, in order Grexit to be avoided, and to keep the Eurozone unified.