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Why 'Grexit' is inevitable

Greece's pro-bailout parties may have won enough votes to form a government but a Greek exit from the eurozone still appears inevitable.
Last modified: 18 Jun 2012 12:18
Photo: AFP

Greece's pro-bailout parties may have won enough votes to form a government but a Greek exit from the eurozone still appears inevitable.

Why? Because the austerity imposed by the troika – the International Monetary Fund, the European Central Bank and the European Union – is crippling what's left of the economy.

There are those who say, it would be cheaper to keep Greece within the euro, or even pay Greece to stay!

But German Chancellor Angela Merkel won't countenance demands to renegotiate the bailout. It's a vote loser, and other bailout nations will demand the same. Although there are signals coming out of Berlin that there could be some easing of terms.

The fear is that this could be Europe's 'Lehmans moment', referring to the collapse of the US investment bank which triggered the North Atlantic financial crisis and froze the ability of banks to raise money to keep branches open, leading to global job losses and the great recession.

To avoid that, Swiss investment bank UBS says it would be cheaper to pay or write off 60 billion euros of Greece's debts to help Athens with its finances. But if Greece where to leave, the cost would be between 225 billion to 800 billion euros - with Europe's overstretched taxpayers footing the bill.

Then again – some would say otherwise – Greece holds the trump cards in the form of $500 billion it owes to the EU, ECB and IMF.

Greece could play for time, waiting until it balances its budget, excluding interest payments to the troika - and then default, again.

Or in this game of chicken, Greek banks could run out of money, the ECB may refuse new money leaving Greece to pick up the pieces. Everyone is running the books, trying to figure out the winners and losers.

Money will run out for Greece to meet its bills by mid-July.

And then the losers will be Greek pensioners, civil servants and those on welfare - the most needy in society. And tax payers, who have seen taxes rise to excruciating levels.

The Royal Bank of Scotland believes there is a 90 per cent chance of Greece leaving the euro in the next 12-18 months, while Citigroup says there is a 50-75 per cent chance.

Yet no one can force Greece out of the euro. You can't stop a nation using any currency they choose, as demonstrated by Montenegro which uses the euro yet is not a member of the European Union or the eurozone.

Still, in the greater scheme of things, all of this is a sideshow, since the destiny of the eurozone will be decided in Spain and Italy.

Nouriel Roubini tweeted on Sunday: "Italy & Spain may lose market access & need Troika rescue regardless of Greek elections as Spain bank rescue botched."