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Dublin: 17 °C Thursday 24 July, 2014

Column: Greek crisis might not be all bad for Ireland

Former trader Nick Leeson argues that while Greece would take a long time to recover from a default, it could have a number of outcomes for Irish fortunes…

Nick Leeson

GREECE SAYS IT is not leaving the euro. Everyone else says Greece must default on its euro debt. Obviously both can’t happen and the stark contradiction is more than worrying for all of the eurozone countries, even more so for those, like Ireland, that are heavily indebted.

Will Greece default? I have always maintained that it will but the Greek government is doing its level best to suggest otherwise. This week, it insisted that the country would meet its latest fiscal targets “without delay, without exception and deviations” after European authorities said they would decide in October whether to let the country draw down more bailout cash.

The comments come amid mounting expectations that Greece will have to dramatically restructure its debt, after failing to live up to the commitments of its original bailout deal. European finance ministers have delayed a crucial €8bn bailout payment to see if the Greek government can possibly accelerate its privatisation programme and implement deeper spending cuts.

Greece is effectively out of money by mid-October so the bailout package – or more specifically the possibility of it not continuing – could set in motion a very serious set of consequences.

If Greece does default, grave problems will immediately start in Athens. The state will no longer be able to borrow euro and as it is already hardly able to extract enough euro from its own population, won’t be able to pay its bills. Almost immediately, many of the hundreds of thousands of civil servants will stop coming to work because they stop receiving pay cheques. The knock-on effect will be that many private businesses that depend on their patronage also cease to function and cease to pay their employees. Bank failures will follow and savings will vanish plunging the country into even deeper problems.

It’s not something you would wish on a eurozone partner

With little other option, people will have to sell the family silver. First to go will be the trappings of family wealth, cars, houses and their businesses. The vultures will circle and pick up what they can for a fraction of the going price. The government will go one stage further and look to sell what they can. Islands, beaches and historic sites will all be available in order to keep the country going and tide themselves over. Greece will then effectively become a nation owned and controlled by private equity and sister nation funds.

After a long period of time, the euro prices of a Greek vacation or a Greek factory or Greek-made goods will become attractive and euros will rush in from abroad. Jobs will start to rematerialise and the economy, after taking a sound beating, will begin to grow again. But this will take a very long time and will come at far more serious social cost as it will all be preceded by riots, political instability and mass privation.

Not something that you would wish on an enemy let alone a partner in the eurozone.

Ireland is sat on the sidelines, diligently going about its business, reaching its targets and staying onside whilst others like Greece stray offside. If Greece does default, serious questions will need to be addressed about the sustainability of the other bailout packages. As mercenary as it may seem, Ireland would then likely benefit from an adjustment to its own bailout package. The government is playing their cards very close to its  chest and not laying down any cards until they see the situation evolve.

But are we being too narrow-minded in our thinking? Would the Eurozone survive? Were Greece to return to the drachma, a disorderly break-up of the euro would push the European Union to the brink of collapse. Even the stronger economies would falter, contracting by as much as 25 per cent in the aftermath.

There is no option but to continue the ‘wait-and-see’ approach

Countries outside of the Eurozone are finally waking up to the seriousness of the situation. Britain is said to be drawing up contingency plans for a catastrophic collapse of the euro. Experts fear that such an outcome will see their own economy plunge back into a recession that would
be ‘beyond comprehension’. Even the most die-hard pro-Europeans have reluctantly had to accept that the eurozone is in terminal trouble. Formal Liberal Democrat leader, Lord Ashdown, a long-time supporter of the single currency, when asked whether he thought the euro could survive, responded, “No I don’t”.

US treasury secretary Timothy Geithner, who has already admitted that Washington was ‘behind the curve’ in tackling its own financial crises, has urged Europe to act decisively.

Ireland’s fate at the moment is clearly not its own. There is no option but to continue with the ‘wait-and-see’ approach that has served us reasonably well thus far, but the worry lines are set to deepen.

The situation is far from ideal but there is no other option but to see which way the European superpowers of France and Germany will direct the future of the Eurozone. Some suggest a ‘core euro’ will be the likely outcome. Ireland would likely play no part in that.

As the situation unfolds, it is essential that the government consider all potential outcomes and position themselves accordingly. If Greece is allowed to default, investors might naturally wonder which other countries might default.

What would happen to us if Greece defaulted?>

Timeline: How did it come to this for Greece?>

Explainer: If Greece goes bust, who gets crushed?>

Read: Previous Nick Leeson columns for TheJournal.ie>

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