Grexit Strategy

29/05/2012 Worldwide


Grexit Strategy

If, as seems increasingly likely, Greece defaults, this implies leaving the euro, says Prof. Morten Olsen. Both Russia and Argentina bounced back from defaults and the advantage of being able to devalue their own currency could help Greece, too. The big question is whether a Greek exit would lead to a loss of confidence in the Eurozone that could trigger a run on the banks.

A Greek default followed by a departure from the euro zone could bring about short-term benefits for the country, explains IESE Prof. Morten Olsen of the Economics Department. Other countries that have defaulted in recent years, such as Russia, Argentina and Iceland, have rebounded relatively quickly, suggesting that Greece may be able to do the same. And by going back to the drachma, Greece will be able to depreciate its own currency, regain competitiveness and boost exports.
But a Greek exit is risky for Europe, since it could trigger bank runs in other countries. If that happens, the EU will have to decide if it wants to step in and rescue banks and governments. Prof. Olsen points to two options for stabilizing the economy: the EU could introduce euro bonds or the ECB could buy government bonds that private investors are no longer willing to hold.

IESE Economics Weekly