World First's chief economist, Jeremy Cook, takes a look at the implications of Greece leaving the euro. Just how likely is a Grexit and what would it mean for Greece and the rest of the eurozone?

1. World First briefing note:
The problem with Greece
Jeremy Cook
Chief Economist

2. What’s going on?
Negotiations between Brussels and Greece are not
going well
The Greek government is unwilling to put forward a
plan that in keeping with Syriza values
Brussels unwilling to relax previously agreed bailout
conditions
Decisions on sales-tax increases, pay cuts and public
sector job losses need to be made and ratified

3. Another bailout?
Greece is unable to raise longer-term funds at competitive
interest rates – see table below
Borrowing for 3 years at 29% and 30 years at 10% is
another road to ruin

4. Cash levels
Media and market reports seem to show
that Greece had around EUR7bn cash on
hand at the end of February
With monthly debt repayments (of debt
and to the IMF) of around EUR1.3bn,
Greece would effectively be out of cash by
end of May, beginning of June

5. Repayment timeline & key events
Date
What's
happening?
Sum
cash
repayment
/
Outcome
24-­‐April
Eurogroup
mee0ng
of
Finance
Ministers
in
Latvia
End
of
April
Wages
and
pensions
payments
of
EUR1.7bn
due
01-­‐May
IMF
payment
of
EUR200m
interest
due
Total
repayment
in
May
=
EUR1bn
08-­‐May
6
month
bond
maturing
worth
EUR1.4bn
11-­‐May
Eurogroup
mee0ng
of
Finance
Ministers
12-­‐May
IMF
repayment
of
EUR780m
due
15-­‐May
3
month
bond
maturing
worth
EUR1.4bn
05-­‐Jun
IMF
repayment
of
EUR310m
due
Total
repayment
in
June
=
EUR1.7bn
12-­‐Jun
3
month
and
6
month
bonds
maturing
worth
EUR3.6bn
in
total
12-­‐Jun
IMF
repayment
of
EUR350m
due
16-­‐Jun
IMF
repayment
of
EUR580m
due
18-­‐Jun
Eurogroup
mee0ng
19-­‐Jun
3
month
bond
maturing
worth
EUR1.6bn
19-­‐Jun
IMF
repayment
of
EUR350m
due
End
of
June
Deadline
for
agreement
on
new
debt
programme
10-­‐Jul
6
month
bond
maturing
worth
EUR2.0bn
Total
repayment
in
June
=
EUR1.7bn
13-­‐Jul
IMF
repayment
of
EUR465m
due
17-­‐Jul
3
month
bond
maturing
worth
EUR1bn
20-­‐Jul
Bond
to
ECB
matures
worth
EUR
3.5bn

6. What needs to happen by June 30th?
June 30th is the deadline for a deal and additional
bailout funds to include:
1. Less onerous austerity measures but updated reforms
2. Debt relief by extending tenor, reducing interest on loans
3. Brussels oversight of reforms and cash upon criteria being met
Without this we are staring down the barrel of ‘Grexit’ though I
maintain that the probability is less than 30%. Why?
Greece would need to walk away from a deal or be driven by unrealistic
demands from creditors and European desire for a break-up is minimal
A likely domino fall would be such as found on the next slide

7. Grexit – possible timeline*
No
deal
agreed
on
June
30th.
Funding
to
Greek
sovereign
and
banking
sector
dries
up,
capital
controls
introduced
Referendum
on
Eurozone
membership
called,
no
vote
wins,
defaults
on
debt
(if
not
done
already
New
debt
issued
under
local
law,
prin0ng
of
a
new
drachma
begins
Greece
exits
the
Eurozone
with
dras0cally
weakened
currency,
economy
and
debt
levels
*
A
lot
of
hypothe0cals
within
this
model

8. Grexit – what happens to Greece?
Any new currency would be subject to a
sharp devaluation. Based on similar
revaluations in recent years (Thailand,
Argentina, Russia, Korea, Mexico, Iceland)
Also hyper-inflation, local
default by companies &
widespread recession
0%
10%
20%
30%
40%
50%
1
month
3
months
1
year
3
years
5
years
Percentage
loss
seen
in
currency
crises

9. Grexit – what happens to
the rest of the Eurozone?
An impact, but a modest one. Kneejerk weakening of EUR.
Expect GBP and USD bought as havens
Remains under the protection of the European Central Bank
which would likely create a strong policy response. This could
be via additional QE or direct cash to sovereigns by
purchasing debt directly
Bigger issue is philosophical – wasn’t the Eurozone
meant to be irrevocable?

10. Losses to governments are outlined below

11. Grexit – Possible contagion elsewhere
A Greek exit from the EZ sets a precedent and probably
would raise investors’ fears of contagion elsewhere
The imposition of capital controls could spook depositors
in other periphery countries
At the margin, I think that the response of the ECB would be
enough to prevent widespread contagion

12. Conclusions
While a Greek default on its debts is likely in the short
term without additional support from the EU/ECB/IMF,
a Greek exit from the Eurozone is not guaranteed.
A Grexit should be avoided as it would ruin Greece. The
effects within the Eurozone are painful and would
trigger support from the ECB and governments.
At the margin, I think that the response of the ECB
would be enough to prevent widespread contagion
and other central banks would be quick to support the
global economy.

13. www.worldfirst.com/uk/blog/
jeremy.cook@worldfirst.com