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Thursday 7 December 2023 Dublin: 11°C
separation anxiety

Explainer: Why a 'Grexit' would be bad news for Ireland... but probably won't happen

Greece goes to the polls in just over a week – we look at what that could mean for this country.

Petros Giannakouris / AP/Press Association Images Petros Giannakouris / AP/Press Association Images / AP/Press Association Images

FOR PEOPLE WITH their eyes on the financial markets, it has been less a case of being wary of Greeks bearing gifts – more those carrying anti-austerity policies.

Over recent months, attention has been focussed on the ongoing march of the left-wing Syriza party and the chance that an election win would eventually end in a so-called “Grexit”.

With Greeks headed to voting booths in just over a week, takes a look at why European leaders are so spooked and what the likely election outcome in the nation of 11 million would mean here in Ireland.

What’s this Grexit all about?

If the polls are to be believed, the anti-austerity Syriza is on course to take government from the ruling conservatives in the election on Sunday.

That possibility has already been sending wobbles through financial circles based on the party’s pledge to say goodbye to deep budget cuts and renegotiate the terms of its €240 billion bailout.

In the event of a stalemate with lenders, Greece’s economy would quickly come grinding to a halt, leaving the EU with two basic choices.

One would be to keep the troubled nation in the eurozone and row back on deals already signed. The second, more-drastic scenario, dubbed a Grexit, would mean the EU stood firm and severed the country from the common currency to fend for itself.

What are the chances of it happening?

For starters, it depends on Syriza winning the election. Sitting prime minister Antonio Samaras has so far been holding firm on the austerity path despite being on the wrong end of 25% unemployment – or roughly 50% among the nation’s youth.

He has been using Grexit fears as a propaganda tool, claiming that the election will effectively be a referendum on Greece sticking with the EU.

Greece EU Ireland AP / Press Association Images Greek Prime Minister Antonis Samaras and Taoiseach Enda Kenny in 2013 AP / Press Association Images / Press Association Images

For his part, Syriza leader Alexis Tsipras has consistently vowed to end austerity and strike a new deal with lenders, although his rhetoric has softened as the prospects of an election win have started to look increasingly likely.

But any rejection of the tight budget constraints linked to Greece’s bailout terms puts the country on a collision course with influential EU member states.

The most powerful, Germany, where balanced budgets are akin to gospel, has been leading the vanguard in tough talk.

A recent Der Spiegel article, seen as an attempt to spook left-wing Greeks into falling in line, said Chancellor Angela Merkel and her government had now come to see a Grexit as “manageable”.

Germany Greece Michael Sohn / AP/Press Association Images German Chancellor Angela Merkel Michael Sohn / AP/Press Association Images / AP/Press Association Images

Why does anyone care if Greece ditches the euro?

The fear is that Greece returning to the drachma, or something like it, would send the signal to other member states – and the financial markets – that euro membership was negotiable and any disgruntled nation could pull the pin on the common currency.

Economist Danae Kyriakopoulou, from the UK-based Centre for Economic and Business Research (CEBR), recently wrote that the currency bloc had found itself at a “critical juncture” and it was stuck between two unhappy outcomes.

“On the one hand, the evidence against the policies of austerity that have been implemented in the periphery in the aftermath of the crisis has been overwhelming,” she said.

On the other hand, a breakup of the union starting with a Grexit would also be catastrophic and (we think) that the risks to the rest of the eurozone will be much higher than many politicians and the media consensus dare to admit.”

While European banks have limited exposure to Greece, where a new drachma could be worth 50% less than the euro, JP Morgan has forecast a Grexit could still send the common currency crashing nearly to parity with the US dollar because of the “contagion effect” in neighbouring countries like Italy.

Of course, there’s a good chance these worst-case scenarios won’t end up playing out at all.

Economists surveyed in a recent Bloomberg poll said there was an 80% chance Greece would stay the course with the euro even if Syriza went in to government with a majority.

The European Commission has also put its foot down, saying earlier this month that eurozone membership was “irrevocable” although it was more opaque on whether a country that was dragging the chain could be booted out.

What would a Grexit mean for Ireland if it happens?

Goodbody chief economist Dermot O’Leary thinks that even with Greece acting as a drag on the eurozone, Ireland would, on balance, be better off without a Grexit.

“The direct link between Greece’s economy and the euro is miniscule … our concern is that you would have a repeat of what happened to the markets, sovereign bond markets in particular, in 2011 and 2012 when there was concern about the future of the euro as a project,” he said.

Bond prices spiked at the time making it much more expensive for many European governments to borrow money, although since then Ireland’s economy has gone through a transformation and its debts are now seen as a pretty safe bet.

chart5_e Eurozone bond prices

Another, more controversial, reason for both Ireland – and importantly, Germany - wanting to keep Greece in the eurozone is that being wrapped up with basket-case economies actually helps export-driven nations.

Weaker economies dragging down the euro works in favour of the German industrial machine because it makes selling goods to the US, UK and Asia cheaper and therefore more competitive.

And while consumers rightfully aren’t fans of a low euro – bringing with it expensive imports and trips outside Europe – it is also a win for Ireland’s economy as nearly two-thirds of all exports end up outside the eurozone.

Guinness Breweries Leon Farrell / Photocall Ireland Leon Farrell / Photocall Ireland / Photocall Ireland

Can we negotiate a better debt deal if Greece agrees one?

That’s another potential plus for Ireland if Greece strikes a new deal with creditors and remains with the euro, although the odds don’t look so good.

The hope is that Ireland, the troika’s star pupil for its economic turnaround since taking a €67.5 billion bailout, could use the bargaining chip of a Greek agreement to also strike better terms with the European lenders.

Tánaiste Joan Burton this week said she saw merit in an international debt-relief conference where the money owed by all the bailed-out PIGS nations – Portugal, Ireland, Greece and Spain – would be on the table.

Action Plans For Jobs Photocall Ireland Photocall Ireland

But O’Leary was not convinced Ireland would get a better deal, even if Greece squeezed lenders into offering it an easier way out, because it had already renegotiated some of its bailout terms.

Those agreements included the Republic repaying its high-interest IMF loans early and stretching out €25 billion in government bond sales stemming from the collapse of Anglo Irish Bank and Irish Nationwide over 20 years.

That won’t stop politicians here asking for further relief, but I think Ireland’s considered to be out of trouble and back on its feet now,” O’Leary said.

READ: Brian Lenihan wanted to burn bondholders – but he was overruled >

READ: The ECB will get radical soon to stop the eurozone going down a deflationary hole >

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