Our Opinion: 2013

Is a Grexit still likely?

It is always a privilege to be in Athens – particularly when, for the first time in a long time, there is an atmosphere of cautious optimism.

Yesterday, Parliament approved its 2014 budget plan, announcing €3 billion austerity cuts and forecasting a return to growth next year. The usual political rally opposing any cuts attracted only a few hundred people – a shadow of former demonstrations where tens of thousands took to the streets of Athens to protest the belt-tightening.

Whilst not wanting to dent any optimism here, I want to add a different prospective.

The Greek economy is forecast to finish this year with output 4% lower than at the start of the year. Since the recession started, the economy is 25% smaller than it was. To put that in context, the US shrank by 30% in the 1930s Great Depression.

The OECD (Organization for Economic Co-operation and Development) thinks the economy will continue to shrink in 2014. Within the Euro, the country must compete with the more efficient economies in the North. It can only do so by driving down prices, wages and living standards. The hard truth is that, as long as Greece stays in the Euro, it faces years of economic decline. Unemployment is 27%, rising to 55% amongst young people.

In 2011, many commentators felt the Greek exit from the Euro (Grexit) was inevitable. However, it could never have happened. Greece was trapped. The country had a huge trade deficit (importing significantly more than exporting) and the Government run a big budget deficit too (having to borrow on the international market to funds its spending). Had Greece come out of the Euro, the Government would have run out of money within days, and it would have been impossible to pay for oil, medicines and food imported.

The Government forecasts for 2014 change that. Greece now runs a trade surplus from, amongst other things, a 12% growth in tourism this year. It imports far less than it used to and it doesn’t have to rely on borrowing money to keep afloat. In 2014, the state will have a primary surplus too, raising enough cash to cover its day-to-day running costs (just not enough to pay the horrifying interest on its debts).

From next year, Greece can leave the Euro without having to ask anyone for help. The Government will not collapse. The interest on its debts won’t matter since it can simply default or pay back in the New Drachma. The trade surplus will increase, because the devalued new currency will boost exports further.

I am a firm believer in Greece and it has been a difficult experience watching the growing despair here in recent years. The beaches should be packed with tourists enjoying cheap holidays and the hospitality of the people, the factories should be buzzing with orders for exports, and the fields should be teeming with olives to sell around the world. A dramatically devalued New Drachma would create an export boom and the holiday trade will soar.

Our clients certainly will not agree with this scenario. They hold assets (particularly property) in Greece and their wealth will be significantly dented.

Is that going to happen? The Syriza party is ahead in the polls and may well lead the country out of the single currency. By 2015, freed from the shackles of the single currency, Greece could be booming again. A Grexit will not be a humiliation, but the opportunity for a ‘Hellenic Renaissance.’

The Grexit has not been cancelled – just delayed. Such an event will be real shock to European markets (which will shudder at the conclusion that the Greek debt will never be repaid).

Whatever happens, and whenever it happens, we will continue to work closely with our clients, to ensure they are aware of risks and able to manage them, with careful planning, in the best way possible.