Greece went on a bank holiday and imposed capital controls on Sunday as Eurogroup decided to refuse the extension of the loan agreement with Greece. Greek Prime Minister Alexis Tsipras, while blaming ECB and creditors, announced that the country will be shutting down its banking system in order to avoid a run on the banks. The country is now more likely to miss its payment of $1.7 billion of debt to International Monetary Fund (IMF) on Tuesday pushing it closer to an exit from the eurozone.
How it got here: from Greferendum to Grexit
While the country reels under massive amount of debt and no growth whatsoever, the current wounds are self afflicted. Since the victory of the radical left Syriza party, Greece has been teetering on the brink of a crisis. The prime minister accentuated the situation by announcing a referendum on the bailout programme offered by EU states and the international community holding the talks and the euro economy to ransom till July 5. Athens faces a tough situation now as creditors are not willing to wait till July 5 for a decision and Greece has put the ball in IMF’s court which shall decide the future course of action.
For now, Tsiparas has shut the economy to prevent investors from flocking, but the bigger problem lies in the days ahead. If IMF decides to put Greek on default the country will likely face an exit from eurozone losing the blanket of the currency and will likely have to go back to printing money which means moving to a devalued Drachma, the Greek currency. The costs of going back are far too high and will push the country further into financial abyss.
Even if the international organisation decides to give some wiggle room to the country, the crisis will still not be averted but delayed.
The Eurozone problem
As the Greek economy moves closer to the judgment day, its spells a bigger trouble for the eurozone. While the euro fell almost 2 per cent, the crisis did not have much impact on bond markets across the region. Though eurozone leaders will rejoice dropping a liability that Greece has become, the fallout may have a greater impact on the currency. The exit of Greek may give room for others facing similar problems an option to exit leading to the demise of the union.
The fall in the euro will also trigger a series of events though the current depreciation in currency has made exports more competitive, a further depreciation can hurt the prospects of exporting nations with the value of exports eroding too fast. Also the imports are becoming costlier for the economies with high levels of unemployment rate and low spending capacity.
The only relief for EU comes in the form of its sovereign buying programme. With the eurozone periphery still fragile any speculative selling of bonds can be countered by ECB with bond buys for the weaker nations.
Global concerns and India
The Greek tragedy has left the markets around the world jittery, the turmoil may continue for some days till a decision is reached on ‘Grexit’. The possibility of the ‘Grexit’ and the uncertain future of eurozone will not only hurt global growth but may push chances of US Fed rate hike further.
Indian bourses were rocked with the unfolding crisis in Europe—which is India’s largest trading partner—with Greece set for a default on its sovereign debt. The 30-stock benchmark Sensex and 50-stock Nifty both fell almost 2 per cent on Monday morning. In case of a ‘Grexit’, India will have to work fast towards guarding its institutions and limiting exposure to countries that will be affected by the crisis. The weakening of its trading partner may hurt exports which are already languishing and further weaken the rupee against the dollar.
The stock markets have the most to lose—with corporate earnings already hurting the stock indices, a ‘Grexit’ coupled with a dip in growth momentum may further hinder the rise in the stock markets.
For the fastest growing economy in the world, there is still some room to escape the crisis unhurt, but the government will have to work towards ensuring that reforms are passed in the monsoon session of the Parliament and investments bottlenecks are cleared to stop investors from losing confidence and to provide a cushion in the worst case scenario.