The scariest quote for the world economy this week came from a member of the European Central Bank’s executive board. Asked by Eurogroup President Jeroen Dijsselbloem whether Greek banks would open Friday, his answer was stark:
"Tomorrow, yes. Monday, I don't know," replied Benoit Coeure.
So far, Coeure is right: Greek banks were open on Friday, though that wasn’t what people were worried about. The important issue is whether Greece can come to an agreement with its creditors to release bailout funding that will keep banks running. At the moment, Greece is due to owe creditors €1.6 billion at the end of June, money the government says it doesn’t have. If it can’t either repay or reach an extension deal, Greece might leave the eurozone—the doomsday scenario with the somewhat silly name “Grexit”—though default wouldn’t necessarily mean departure.
On Friday, the ECB apparently gave Greece a short-term cash infusion to last through the weekend, and the eurozone ministers will reconvene on Monday to try to hammer out a longer-term deal. If you feel like you’ve been hearing about this for years, you’re not entirely wrong—there have been dire warnings about Greece departing the eurozone since the spring of 2012. This time really does seem to be different. Greece’s left-wing government has refused to make as many concessions as its creditors want—which isn’t to say that Grexit is inevitable.
“I don’t think we should be too dramatic,” said Simon Johnson, a professor at MIT and former chief economist at the International Monetary Fund. “The Europeans want to keep the Greeks in the eurozone and the Greeks want to stay in the eurozone. There’s still room for deals here, and all of these deals get done at the last minute.”
Johnson isn’t alone. Although the mood has darkened a bit over the last few days, there’s a widespread expectation among many analysts that an agreement will be reached. As some Greeks demonstrated outside of parliament in favor of remaining in the eurozone, others headed to banks to prepare in case that doesn’t happen. “A steady stream of people—though never enough to call a queue—were withdrawing money from the National Bank branch on Athens’s central Syntagma Square,” reported The Guardian’s Jon Henley. Greek depositors withdrew a billion euros on Thursday alone, and €3 billion since Monday.
That’s not quite a full run on the banks, but it’s a step toward it. The way to stop that is to close the banks, but doing so would likely also herald Grexit.
“The typical reason [a bank closure] would happen is that at the bank level or country level you have a lack of reserves, and so you just say, ‘We’re going to stop this earlier rather than wait for the inevitable to happen,’” Johnson said. “I don’t see that as part of a negotiating strategy—you only close them if you’ve been told the ECB system isn’t backing your banks.”
The result would be a series of intriguing but catastrophic complications. The economy wouldn’t stop, exactly, but finding ways to conduct everyday transactions would suddenly become all-consuming. For as long as banks stayed closed, Greeks would have to find ways to get by without using the financial system and accessing their own savings—using cash they had withdrawn before the closures or IOUs, for example. (This is the vicious cycle of a bank run—people are worried about closures, so they withdraw their funds; those withdrawals only make a closure even more likely.)
Meanwhile, the government would have to quickly switch course from frantically negotiating a way to remain in the eurozone to implementing a new currency—presumably a return to some variety of the drachma, used from 1832 to 2001. (CNBC recently guessed it would take around $430 million to mint new money; who knows where funding would come from.)
There’d be all sorts of complications to that. Johnson laid out the simplest: If I loan you €10 on Friday and Greece leaves the euro on Monday, what do I owe you on Tuesday? Is it €10? Or some equivalent in drachmas? If the latter, what is the exchange rate?
Now, imagine that on the level of an entire economy, with elaborate loans and contracts and business agreements laid out over time, and all denominated in euros.
“The bigger problem is disrupting credit; disrupting contracts, which are all in euros; having to renegotiate everything; and whatever that does to trade between Greece and the EU, including of course tourism,” Johnson said.
There aren’t a great number of real-world examples for how this might happen. One recent case is in Argentina, where the peso was pegged to the dollar from 1991 to 2002. Late in that period, it became clear that it wasn’t working—just as Greece, Spain, and other eurozone countries with struggling economies have found, the inability to control your own monetary policy makes it very hard to dig out of an economic hole. In anticipation of a currency devaluation, Argentines began withdrawing cash from banks in U.S. dollars. In response, the government instituted a “corralito,” or little corral, on the system: Residents were limited to small weekly cash withdrawals; those whose accounts were denominated in dollars could only withdraw money after converting to pesos; and business had to be conducted with plastic.
The move was politically disastrous; a series of short-term presidents came and went. Argentina was forced to devalue the peso and establish a floating exchange rate. But within a couple years, the Argentine economy was being hailed as a turnaround success. (More recently, it has hit some turbulence.) That’s perhaps a positive sign. “Would this be a negative hit to Greek GDP and real wages and so on? Absolutely,” Johnson said. “But it’s not the end of the world. Economies do recover from this.”
Economists have speculated that Greece might implement its own capital controls—for example, limiting withdrawals, capping the amount Greeks can send overseas, and preventing the cashing of checks. That would stop short of closing banks, and it could help stave off a Grexit in the event that Greece ran short on cash. It would slow down normal processes and allow more time to strike a deal with creditors, even though the immediate effects on the economy would be nasty.
The hope in Brussels—and in Berlin and in Athens—is that no one will have to find out how a Greek exit would play out. Both sides have sounded pretty acid in the last few days: Greek Prime Minister Alexis Tsipras has been courting Vladimir Putin (does he know what the Russian economy looks like right now?); EU President Jean-Claude Juncker blasted Tsipras in an interview with Der Spiegel and effectively accused him of being a phony socialist who wouldn’t raise taxes on his country’s wealthy. But both sides seem to be fairly close together and have strong incentives to get to yes. For the Greeks, that’s avoiding a massive economic upheaval. For Europe, that’s the preservation of the euro as a permanent currency union. Even if an Españexit or Portuguexit (look, I’m doing my best here) isn’t imminent, creating a precedent where a country can leave would open the possibility to other departures in the future.
And there are spillover effects outside of the currency. While the United Kingdom doesn’t use the euro, it is slated to hold a referendum on EU membership, amid growing euroskepticism. France’s Le Monde used the anniversary of the Battle of Waterloo to publish an English-language editorial pleading with Britain to avoid “Brexit.”
Of course, these have been the stakes all along, and yet European leaders continue to feud as the deadline approaches. Mondays are never fun, but this coming Monday could be a particularly manic one.
