German Economists on Greek Referendum 'The Euro Zone Could Face Ruin'

What consequences would a "no" vote in Greece have for the euro zone?

What consequences would a "no" vote in Greece have for the euro zone?

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Part 4: 'The Papandreou Government Is Taking a Big Risk'


Jens Boysen-Hogrefe of the Kiel Institute for the World Economy

IFW

What do you think of Papandreou's decision to allow the people to vote?

The Papandreou government is taking a big risk, but it also stands to gain a lot. If in the course of the vote, the government is able to convey to the Greek people that things could get a lot worse if they vote no, then that could clearly strengthen the clout of the reforms and also ensure the urgently needed political stability.

What would a Greek "no" mean?

A vote by the Greek people against the savings program could have considerable consequences. International donors would be forced to stop providing aid. Greece would no longer be able to service its debt. The bankruptcies of Greek banks would be inevitable. And because the current expenditures would be greater than current receivables, the payment of (government) salaries and pensions would be jeopardized.

What would a "no" mean for the euro zone?

There is no such thing as an automatic withdrawal from the euro. I do not think it is probable that Greece will voluntarily withdraw from the euro through a "no" vote, but it is still plausible. In any case, a Greek insolvency would certainly be what is called a credit event. Credit default swap insurance would have to be paid out. There would be losses in the financial system and it is unclear at this point who would have to carry them.

The hope remains that the recapitalization of banks can provide timely aid in this regard. The uncertainty regarding the other countries in the debt crisis would continue to increase, especially if Greece were to leave the euro. In the worst case scenario, the people of countries like Portugal, Ireland, Italy or even Spain would make a run on the banks. At that point, only the European Central Bank would have the means to ward off the crisis.

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