Grexit Meaning Timeline What Is The Potential Impact Of Grexit

Grexit Meaning

The term Grexit is a combination of Greece or greek with the word exit, which means an exit of Greece from the eurozone or European union. The Grexit was cropped up due to Greece’s possible withdrawal from the eurozone. The term was introduced by two famous economists of Citigroup, Ebrahim Rahbari and Willem H. Buiter, on February 6, 2012, which subsequently made headlines in media and major newspapers.

The Grexit is critical for investors and others, including economists who tried to study the impact of the financial crisis on Greece itself and the world economy. The term Grexit became popular as Greek citizens proposed to leave the European Union and introduce local currency drachma as the official currency of Greece to ward off the country’s debt crisis.

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Greece Timeline

Many factors were the apple of discord for the Greece debt crisis. The aftermath of the 2009 financial crisis clarifies the extent to which Greece was exposed to the terrible financial ordeal it was going through. In 2010 when Greece was heading towards bankruptcy Greece’s debt to GDP ratioDebt To GDP RatioThe debt to GDP ratio is a metric to compare a country’s debt to its GDP and measures its capability to repay its debt. A country with a high ratio would not have difficulty repaying its debt but will not seek debt due to higher chances of defaulting.read more was exorbitantly high, 146%.

Factors Behind the Grexit

Following are the main factors that lead to the Greece debt crisis:

Corruption and tax evasionTax EvasionTax Evasion is an illegal act in which the taxpayers deliberately misreport their financial affairs to reduce or evade the actual tax liability. This includes using multiple financial ledgers, hiding or representing lesser income, gains, or profits than actually earned, overstating deductions, & failing to file returns. read more which left Greece in debt problems, had been consistent for many decades and were misreported to be in line with guidelines of the eurozone.The trade deficitTrade DeficitWhen the total sum of goods or services that a country imports from other countries is higher than the total sum of goods or services that a country exports to other countries, this is referred to as a trade deficit, which is the opposite of the balance of trade theory.read more also significantly contributed to the Greece crisis because when Greece became a member of the eurozone, the cost of wages went up very high, leading to unmatched positions with available resources.Major industries of Greece like shipping and tourism were going through a terrible ordeal which subsequently fueled the Greece crisis.

Consequences of Grexit

The following are the consequences of Grexit.

To ward off the Grexit, in 2010, when it was evident that Greece was about to exit the Eurozone European Union IMF (International Monetary Fund)IMF (International Monetary Fund)The full form of IMF is International Monetary Fund. It is an organization of international recognition based in Washington DC comprising of 189 countries working towards international monetary cooperation with an objective of establishing economic stability across the globe.read more and European Central Bank came forward to bail out Greece’s economy with €110 Billion loans with conditional austerity measures including structural reforms andPrivatization refers to transferring ownership, operation, and control of a government or public entity to a non-government or private enterprise.read more privatizationPrivatizationPrivatization refers to transferring ownership, operation, and control of a government or public entity to a non-government or private enterprise.read more.However, once it was confirmed that Greece’s economy was falling, investors were asking for a higher interest rate on the loans being given to Greece to boost an economy which failed to create positive results. Instead, it made Greece’s deficit worse.The Greece economy failed to crop up further due to the increasing unemployment rate and poor economic performance across various industries, e.g., shipping and tourism. In the aftermath of the recession, Greece’s economy became worse. As a result, a second bailout package was offered for around 130 billion euros. It was then in the year 2014 when the recession hit Greece again. In 2015, when the new government stepped in with Syriza being elected by the Greek people whose main mandate was to terminate the austerity measures, which they assumed was bone of contention for the failing economy, they restrained the loan repayments to the lenders. Greek people voted to reject the bailout terms and conditions to be followed, which resulted in decreasing trends in stock markets as the perceived chances of Greek recovery were wiped out. The European Central BankEuropean Central BankThe European Central Bank is the apex bank of the member European countries, monitoring the banking and financial functions of all member countries in order to maintain the price stability of the European currency, the Euro.read more provided emergency liquidity services and helped ward off the liquidity crisis. If Greece runs out of the required money, the only option with Greece is to print an alternative currency which could be the Grexit from the European Union.The Eurozone or the European Union has several benefits for its respective member countries in terms of trade and others. Still, at the same time, there are demerits as the 19 member countries share the same currency. Greece’s monetary policyMonetary PolicyMonetary policy refers to the steps taken by a country’s central bank to control the money supply for economic stability. For example, policymakers manipulate money circulation for increasing employment, GDP, price stability by using tools such as interest rates, reserves, bonds, etc.read more including the extent of currency which Greece can print, is controlled by the European Union. Members of the eurozone were afraid that increasing the number of euros in circulation would result in inflation. The exit of Greece from the eurozone will make Greece have its own monetary and fiscal policiesFiscal PoliciesFiscal policy refers to government measures utilizing tax revenue and expenditure as a tool to attain economic objectives. read more and could reintroduce the drachma as their official currency.The reintroduction of the drachma as the official currency of Greece has its limitations as the drachma was expected to devalue against the euro, which will increase the government debt ratio because it provided the loan in the euro. Devaluation of the drachma and official exit of Greece from the eurozone had made the people withdraw more euros, due to which deposits in Greece reduced by circa 13% in March 2012. Devaluation of drachma also resulted in the people withdrawing more euro from the bank, causing the bank to run.

Impact of Grexit

The official exit of Greece from the eurozone had negative consequences. Expected that the initial impact of Grexit would be confined to the extent of minor economic trouble, but in the long term, many economists knew it would be a disaster that could easily impact other European member states at the same time and subsequently affect the entire eurozone. Grexit impacted investors’ confidence very badly, which could be felt in other eurozone, particularly Spanish, Italian, and Portuguese markets. It also increased the chances of sovereign defaults and created a worldwide recession, causing a decline in major economies’ GDP by circa 17.4 trillion euros. Grexit had far-reaching consequences and had affected major economies like the US, China, and Germany, which subsequently increased unemployment across the various sectors.Grexit also impacted the economic policies of the other eurozone members, which had economic and political relations with Greece. Due to Grexit, other members had to write downWrite DownWhen the carrying value (purchase price – accumulated depreciation) of an asset exceeds its fair value, it is referred to as a write down.read more their respective budgets considerably. The budget deficitsBudget DeficitsBudget Deficit is the shortage of revenue against the expenses. The budgetary deficit could be the sum of deficit from revenue and capital account. read more to which Greece owes money increase further, resulting in sovereign defaults. To recover these losses, the government had to raise taxes and further reduce the expenditures desired. All these factors reduced the demand for goods and services, which subsequently impacted the economy and people’s quality of living.

Conclusion

In conclusion, we could say that Grexit had been envisaged as bad for Greece in the short and long run.

The lack of competitiveness of the Greece economy results in the devaluation of drachma compared to the euro.The real income of people, employees including pensioners contracts considerably.Sovereign debtsSovereign DebtsSovereign debt is the money borrowed by a country’s central government, primarily achieved by selling government bonds and securities. Treasury notes, bonds, and bills are some examples of sovereign debt issued by the United States.read more and private debts increased as the euro appreciated against drachma, and Greece could not service the debt obligations.Deposits in the bank were converted into drachma, which decreases the actual deposits kept in the initial euro.No credit had been available for new business as the lenders to Greece were unwilling to lend the same, which reduced the supply of necessities like foods, medicine, fuel, etc.The government failed to balance revenue and expenditure. If the government prints more local currency, it will create inflationary conditions, which will wipe out the improvements being made by drachma.Domestic political parties could not provide a positive economicPositive EconomicPositive Economics is a branch of modern economics that describes, explains, & clarifies several current economic facts with an objective approach. It prohibits value judgement & only revolves around the “what is” scenario. read more environment required to sustain Greece’s growth and prosperity in the long run.

Grexit Meaning#

Greece Timeline#

Factors Behind the Grexit#

Consequences of Grexit#

Impact of Grexit#

Conclusion#

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