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Default and its implications on the citizens and enterprises of Greece

26 September 2011 / 18:09:02  GRReporter
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Ø As a result of the complete financial collapse, bank liquidity will disappear and a very large number of loans will not be served. Banks will 'hang' not only due to the haircut of the value of Greek government bonds, but also due to the difficulties citizens and companies experience in paying their obligations to them.

Ø The banking system will disintegrate if the European institutions do not throw some kind of life-saving belt. Nationalization of banks could be necessary while the system is strengthening but most importantly, the state will remain in the euro zone and deposits will not be impaired.

Ø Business will suffer much. Thousands of companies are expected to go bankrupt for a very short period of time and surviving firms will rely on the low price of their products due to the general devaluation of life in the country. Indebted firms will not be able to maneuver. Banks will resort to confiscations and seizures if debtors are not able to meet their obligations. Other companies that do not have obligations to financial institutions but need funding will also face a dead end, because banks will not be able to give loans.

Ø Social policy will be reduced to a minimum. Social benefits for the majority of the insured will be reduced significantly and the benefits for the disabled and poor will no longer be cut off to rescue the budget. Health funds will not cover research and other services and drugs will not be covered by social funds.

Ø The impasse in domestic economic environment of the country will cause the surviving firms to seek opportunities for realization outside the country, which is expected to lead to increase in exports. Opportunities for support that Europe will offer the Greek banking system will be crucial.

Ø In all this drama, unemployment will be record high, average wages will fall seriously, and competition for one job will rise significantly.

The third option for the development of the Greek crisis considers the most dangerous but still possible scenario that Greece will not only default but will leave the euro zone. The era of the new drachma scares entrepreneurs as well as ordinary citizens.

Ø Suspension of payments will have a direct impact on pensions and salaries in public administration and a large number of government enterprises and organizations are expected to freeze the payments to employees, suppliers and creditors for a while. The lack of liquidity will also freeze the consumption of basic goods and products and in general, the ability to pay salaries.

Ø The financial sector in Greece will bear the worst impact of abandoning the euro and a series of failures will follow. Citizens will try to export their deposits, leading to the final collapse of the banking system. The return of the drachma will reduce significantly the amount of bank deposits due to the expected devaluation of money.

Ø The banks and their operation known so far will remain a distant memory. Long after the stabilization from the default shock, the banks will begin lending under very difficult conditions similar to those known 30-40 years ago. Small loans only under very low risk conditions will be given to companies and corporations will have to avail significant equity. In mortgage lending, banks will provide not more than 20% -30% of the total value of the property and the remainder must come from citizens’ personal savings.

Ø The combination of state bankruptcy and leaving the euro area will certainly be disastrous for the Greek banking system. The only way out for banks is to be nationalized, reformed and strengthened with additional funds from alternative sources of funding. Even if extreme actions are introduced such as restrictions in capital movement, which should prevent mass drawing of deposits, will not help solve the problem alone. Most likely, the state will put them under its wing and those for which there is no room will fail immediately.

Ø Abandoning the euro will immediately lead to the closure of thousands of small and large companies. This process will be a problem for big companies, mainly in trade, industry and services sectors. The reason is the dramatic depreciation of the purchasing power of households and the sharp increase in prices and interest rates.

Ø Without the euro and damaged entrepreneurship, new legions of unemployed threaten to fill Greece. Strong shocks and fiscal instability, which the recession will bring, are likely to alienate any potential investors able to open new companies and new jobs.

Ø The social policy in the default scenario with the new drachma will be void. Pensions and social security will have to be reduced to sustainable levels. Given that today Greece is lacking € 10 billion at least to align costs and revenues in its budget, their value will have to drop to double digits. Health insurance will also be drastically reduced so that it can fit within the capabilities of a shrinking budget.

Ø Exports will be the only sector benefiting because devalued drachma will make the prices of products produced in Greece more attractive. However, economic analysts of the Greek domestic market estimate that the local economy can not keep the benefits of devaluation for more than two years. In addition, representatives of the real business shared exclusively for GRReporter, that Greece has neither production big enough, nor large produce with high added value to substantially benefit from the devaluation of the currency.

Tags: EconomyMarketsDefaultDrahmaEuro zoneBanking systemSupportFinancial collapse
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