What if Greece really did leave the euro?

The Greek election result last month eased us back from the edge of a euro collapse but we still can’t say we have a clear view of where we go from here.

The new Greek government may have to soft peddle on its demands to renegotiate its bailout for example- at least ahead of the next tranche of funding being paid  – but the need to soften the terms is still paramount. Reforms are therefore the way forward to try to drive the economy and deliver the changes the troika want to see.  Without this a euro exit will become a higher probability and while our recent report suggested this was still not a central case assumption, it is clearly a possibility and a possibility that businesses and investors need to plan for.

That however is easier said than done according to our report – given that it is far from clear what would happen to contracts and agreements written in euros if a country did decide to leave. The exiting country would be likely to legislate on the issue before it left but given that the euro would still exist, the legality of unilaterally deciding not to use it could be open to challenge – particularly by international players.

On the ground of course, events may move faster than the courts and most of the Greek market is domestic not international – so we concluded that market power will prevail. Given the state of the market today and the nature of Greek leases, with a 3 month break, that means tenants will benefit over landlords – although some of the latter will be reluctant to lock in very weak deals given the security of tenure tenants can enjoy.

The decision to forego income must be hard to make in today’s market of course and it’s clear that investors as well as occupiers should be undertaking some careful planning to understand what their options are and also to reduce risk wherever they can – whether by diversifying supply chains to better ensure continuity, negotiating new lease terms to capture future possible events, or using how and where they finance their operations to best effect.

Regardless of what measures can be taken locally of course, attention will also focus on other markets – whether that is on the safe havens which benefit from investors ongoing aversion to risk or more stressed economies suffering from a fear of contagion. The former is just continuing a trend we have seen for several years now and one that won’t change until confidence is more firmly grounded. On the latter though, our analysis suggest that fundamentally there need not be a domino effect from one country to another – the position of each and the stresses they face are entirely different – save however for the growing suspicion and hostility of their populations towards austerity. Hence it may still be at the ballot box that the fate of the euro is settled.

David Hutchings,
European Research Group, London

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