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Why Greek Drama May Not Result in Greek Drachma

Despite everything, the country will remain in the eurozone, a respected economist believes.
Andrew Sawers, | US
May 23, 2012

Confidence could be a critical commodity if the current slide in the volume of bank deposits at Greek banks is not to precipitate or hasten the country's exit from the euro. Over the last two years, almost a quarter of bank deposits have been withdrawn from Greek banks and the trend shows no sign of abating.

Some euro analysts put faith in the effectiveness of two policy measures that could prevent the deposit drain from becoming a flood: the European Union's deposit guarantee scheme (which guarantees up to 100,000 euros per depositor) and the European Central Bank's Long-Term Refinancing Operations (LTRO) to support banks struggling with liquidity shortages.

In a web seminar today hosted by the Economist Intelligence Unit, a research and forecasting organization, senior editor Jake Statham responded to a question from CFO European Briefing  about the outflow of deposits. "It is a bit like the proverbial football [soccer] manager under pressure: the [team owner] says, 'We have every confidence in Manager X. He's not going to leave the club.' And then next week the guy gets sacked," Statham said.

"Bank runs are not rational, but when they're happening it's rational to take part in them. It's always a risk," he says. (Full disclosure: The Economist Group owns part of CFO Publications.)  

He added that European officials' response to the crisis "is very much a work in progress. We still think that European policy-makers want to keep Greece in the euro. That doesn't mean to say they'll do anything to keep it in the euro. But our core forecast is they'll do just enough [to keep it in]."

With fresh Greek elections due on June 17, however, "There is quite a fear that anti-austerity parties could perform even better in the re-run of the election, and this could jeopardize Greece's compliance with the austerity mandated by its creditors-and that could lead to its exit," Statham said.

The EIU believes on balance that the euro will hold together, however. It  ascribes a probability of 40% that Greece will actually leave the eurozone sometime between 2012 and 2014. Statham explained that a very large percentage of people in Greece - 80% and rising - are, in fact, in favor of staying in the euro, though they don't like the austerity measures being thrust upon them.  "Any government that comes in will [therefore] have to tread a fine line and won't necessarily be able to just say 'We're leaving the euro,'" Statham believes.

Renowned economist Nouriel Roubini, who has a long record of believing that Greece will leave the euro, wrote recently, "The Greek euro tragedy is reaching its final act: it is clear that either this year or next, Greece is highly likely to default on its debt and exit the eurozone." 

On May 17 Fitch Ratings cut Greece's credit rating from B- to CCC, having upgraded the country two months ago. Separately, Moody's downgraded 26 Italian banks and Standard & Poor's downgraded 16 Spanish banks as well as the British arm of Santander.

But Gerard Lyons, chief economist with Standard Chartered, says that not only are ratings pro-cyclical, the agencies "usually tell us what we [already] know."

Andrew Sawers is editor of CFO European Briefing, a CFO online publication.