By Maximilian Clarke
Greece is perched on the precipice of long term stagflation and increasing isolation with the European Union unless it agrees to stringent austerity measures that accompany the latest €130bn bail out loan, a forex broker observes.
Speaking today, Jason Gaywood, consultant at currency specialist HIFX discusses the indebted republic’s various options, touching upon the consequences for Greece and for other indebted eurozone states should a default occur”
“Greece is playing a dangerous game of brinkmanship with the troika, unless an agreement is reached as early as today to accept the terms of a €130bln bailout offered by the EU, the ECB and the IMF, Greece will almost certainly default on it's debts next month as it simply cannot fund the €14.4 bln it owes in interest payments due on March 20th.
“Disagreement centres around the depth and scope of the austerity measures that come as a condition of the badly needed second bailout. Greek politicians, business leaders and the public are all seemingly united in their distain for the sweeping cuts to jobs, pay and services that they will face.
“However, what would follow an apocalyptic default would be far, far worse in the short-term. Bankruptcy would be followed by expulsion from the Euro. Any new domestic currency would be worth far less than the unified currency with median estimates forecasting a 50% drop in value. Thus, overnight, the effective value of Greek assets and the worth of people's savings and domestic investments would halve. Simultaneously, the cost of any debt to an non Greek lender would double as would the cost of imports. Exports would be cheaper of course but the lack of creditworthiness would make it very difficult for Greece to trade it's way out of trouble.
“The nemesis of all advanced economy's would follow. Stagflation - the toxic combination of negative growth and rampant inflation would plunge Greece into a seemingly irretrievable downward spiral. Years of poverty and hardship would ensue and any subsequent recovery would be bumpy and protracted.
“For the rest of us, a Greek default is most concerning as it is likely to be the catalyst for similar outcomes across the Eurozone with Portugal at the head of a list of potential failures that also includes Ireland, Italy, Spain and even France. This domino effect would tar all of Europe, including the UK, with the poisonous brush of stagflation. Draconian austerity may seem unpalatable to Greek politicians and the electorate alike but for their sake and ours, let's hope an agreement is forthcoming later today.”