Tuesday, June 12, 2012

We must avoid an accidental Greek exit

by Moritz Kraemer

Financial Times

June 12, 2012

Greece returns to the polls on Sunday in another attempt to elect a viable government, and the outcome of the election remains highly uncertain. Despite the broad-based support for euro membership among all major Greek parties and the general public, S&P is of the view that there is at least a one-in-three chance that Greece will exit.

A Greek exit could be brought about almost by accident. A Syriza-led government that fundamentally rejects the reforms agreed with the “troika” – the International Monetary Fund, European Commission and European Central Bank – could lead to a suspension of external financial support.

Deprived of its last source of credit, the government would be forced to balance its cash budget immediately. Given Greece’s structural problems of raising tax revenues, the government may have little choice but to cut spending even more vigorously and to run up mounting arrears.

In such an environment, Greece’s economic decline is likely to gain speed, with additional job losses and the political and social crisis worsening. And where hopelessness and despair prevail, populist policy measures, such as a eurozone exit, may come to pass.


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