Eurozone debt crisis invents a new world for a growing fear – the ‘grexit’

A new word has entered the eurozone lexicon: Grexit.

The term refers to the growing possibility debt-laden, austerity-averse and now apparently ungovernable Greece may exit the euro zone.

No one actually wants that. Least of all the Greeks

In a recent poll, 81 per cent of Greeks said they wanted to remain a member of the 17-nation region originally created to rival the U.S. and Asia as an economic powerhouse.

Germany, the region’s economic strongman, doesn’t really want it either despite Chancellor Angela Merkel’s apparent unwillingness to budge off her demands that Greece cut its spending in exchange for a bailout.

But the continuing uncertainty about what could happen next hung over global stock markets on Monday.

In Toronto, the S&P/TSX composite index fell 1.76 per cent to 11,488.53 and is now down nearly 4 per cent for the year.

In New York, the S&P 500 slid 1.1 per cent to 1338.35. The German and European indexes were also down.

Sliding commodity prices were a factor on the resource-heavy Canadian exchange as China’s blistering 8 per cent economic growth rate begins to cool.

But it was the growing turmoil in Greece that was grabbing all the attention as negotiations to form a new coalition government failed, sparking talk of a Greek exit from the eurozone.

“I still think there is quite a bit of political will in the European Union to prevent what would be a step backwards in the process of European integration,” said Grant Amyot, a professor of political studies at Queen’s University.

The consequences of leaving the union would be very high for both sides, he cautioned.

Greece’s former currency, the drachma, would fall by as much as half against the euro, making imports more expensive and debt repayment difficult, Amyot said

Meanwhile, the rest of the European Union would be destabilized, driving up the cost of debt in the other weaker nations, including Spain, Portugal and even Italy, Amyot said.

However, he said, German policymakers are “genuinely exasperated” with Greece, which has required repeated financial assistance to avoid defaulting on its loans.

On May 6, Greek voters turfed out the political incumbents but the winning band of anti-austerity parties has failed to form a coalition government in its place.

The second-place party, led by 37-year-old Alexis Tsipras, has promised to keep Greece in the euro while refusing to scale back public sector pensions and wages in return for loans that keep the country out of bankruptcy.

With Greece set to run out of money as early as July and no new government in place to negotiate the next aid installment, some investors are betting a Greek default and euro exit will happen sooner than later.

At the very least, another Greek election may have to be held next month, observers said.

“In order for them to get some more loans from the troika — the International Monetary Fund, the European Central Bank and the European Commission—they (Greece) have to implement another $11 billion in cuts,” said Kip Beckman, principal economist with the Conference Board of Canada. “And now they don’t have a government that’s really functioning. If they don’t have a government that can agree whether to implement the cuts, the whole thing could collapse like a deck of cards. And Greece would have to default and leave the euro.

“That’s probably what the market is speculating on.”

It’s unclear whether Greece can legally leave or be forced out.

“It’s a bit like the drummer in the band. If the band doesn’t like the drummer, there are ways of getting rid of the drummer,” a eurozone diplomat told Reuters.

For now, all eyes will be on Tuesday’s scheduled meeting between Merkel and Francois Hollande, the newly elected French president, as he attempts to soften the German leader’s demands.

“We certainly have a lot to worry about,” said John Manley, chief equity strategist for Wells Fargo Advantage Funds in New York. His firm oversees $207 billion. “The odds of Greece leaving the euro are higher. It’s an enormous game of chicken that they are playing with each other. To the degree it does represent the democratic process in Greece, it makes it more likely they default and the Europeans have to do something.”

[TheStar.com]