Grexit will happen much more quickly than politicians think

Allister Heath
CURRENCIES are social constructs. They are only worth something because everybody else believes them to be worth something. That was partly true even of traditional, commodity backed currencies – you can’t eat gold – but it is undoubtedly the case of today’s paper money. We accept notes and coins – or digital claims to them – in return for selling our labour or assets. We know that we will be able to exchange our fiat money for goods, services and assets at any time of our choosing.

But if something were to go wrong – a banking crisis that meant cash machines suddenly stopped working, for example – then suddenly trust would be broken. We would all realise we are holding useless pieces of paper – and panic. We would go from being a financially sophisticated society to one governed by barter and the law of the jungle. Gold and silver would once again emerge as valid means of exchange and stores of value but only for those clever enough to have stocked up on precious metals.

There are parallels as well as differences between this and what is happening in the Eurozone. Membership of the single currency has always been partly about self-fulfilling expectations. If everybody thinks a country is bound to stay in, then companies continue to buy its assets and citizens continue to keep their cash in domestic bank accounts – all of which makes the economy in question more likely to remain a member. But when the sceptics reach a critical mass – and even central bankers begin to predict a country might leave, as happened with Greece over the weekend – the chances of a departure start to rise uncontrollably.

We are moving ever closer to such a tipping point. If and when opinion shifts decisively towards assuming the necessity of a Grexit, as it is increasingly becoming known, a departure will happen much more quickly than anybody is currently predicting. The chain of events is clear. The slow, invisible run on Greek banks – whereby billions of euros have been shifted abroad or converted into property or gold over the past couple of years – will suddenly explode into the open. From one day to the next, ordinary Greeks will camp outside banks waiting to get hold of the fresh supplies of banknotes delivered every morning. Nobody will transact with Greek banks. Global companies will shut or write off their Greek operations, and move out all their euros from local subsidiaries.

The last remaining question is whether the negotiations to form a new government succeed – or whether Greece ends up with fresh elections and a rabidly anti-austerity government. If the latter, as looks increasingly certain, there is no way that the European authorities will feel able to extend yet more bailout funds to Greece when its current batch runs out in July.

Nobody will wait until Greece’s last handout is entirely used up, however – it is easy to work out that no more EU money would mean that the government would no longer be able to keep paying public sector wages and benefits, and that it would default on its national debt. The only way to prevent a complete run would be to freeze all bank accounts, impose capital controls (in breach of EU rules) and for the government to attempt to buy yet more time by issuing IOUs. That won’t work, so it will quit the euro – and that means all Greek banks losing their ECB liquidity and going bust. Why would anybody wait for any of this? As soon as it becomes apparent that the game is up, Greece will be forced out of the euro. It could all happen very quickly indeed.
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