National Bank of Greece (ADR): Investigating The Grexit

Weakening talks with creditors raise the possibility of a Grexit

NBG

By: TROY KUHN

Published: Apr 9, 2015 at 9:23 am EST

Greece’s top banks, including National Bank of Greece (ADR) (NYSE:NBG) brace themselves for the battle against default as the $484 million repayment to the International Monetary Fund reaches its deadline today. Despite having promised to meet the IMF obligation, Greece realizes that it could default on a number of payments coming due soon. Failure to reach a compromise over economic reforms and a consequent bailout extension could eventually throw the country out of the EU. While a Grexit is more often dubbed as the last straw for Greece, it could in fact be the most suitable plan of action to recover the country’s economy from contagion.

The present crisis has overseen a bulk of Greek sovereign debt being thrust onto official creditors, the International Monetary Fund, the European Central Bank and other EU governments. This is essentially because such agencies can better absorb default related losses. According to a recent revelation by Fitch Ratings, the exposure of private EU banks to Greek debt is much lower than the $18.36 billion level it stood at in September last year. Fitch Ratings further specified that a majority of the present debt exposure is through short-term and speculative debt.

Contrary to popular belief, the Wall Street Journal is of the opinion that a Grexit won’t pull in other small EU countries with it. Hence, a domino effect is not imminent. Onset of the Greek crisis has witnessed countries like Portugal, Ireland and Spain gearing up on their supply side reforms to shield their economies from looming threats. Moreover, bond yields in these countries have showcased stability and remained considerably low, amid rising Greek instability.

Regardless of what the Greek left wing government’s initial plans for the country were, presently, Greece runs acute threat of being bailed out without any economic reform plan. If Greece’s international creditors license the country to increase government spending and revert privatization and labor market independence, they would in fact be encouraging anti-reform policies elsewhere in the country.

Experts believe that the initial bailouts granted by the EU were somewhat flawed. These bailouts were designed to boost tax revenues with little or no insight for growth driving reforms. An ideal situation for Greece would be to promote privatization and deregulation and cut back on government expenditure and tax rates to inject consumer spending in the economy. However, the ruling Syriza government has adopted a completely opposite stance. The government's status quo ante promotes higher government expenditure, tax policies that decelerate growth and obstacles in deregulation.

Moreover, experts believe that the toughest dispute against a prospective Grexit that it would seriously hamper the reputation of the Eurozone. The EU has long boasted about its staunch stability, hence a Grexit would seriously dent the credibility of its members. Moreover, it could also send a false signal that the bloc is more of a currency peg allowing members to enter and exit based on convenience. Nevertheless, a Grexit could also push the remaining countries into serious economic restoration.

Research by Goldman Sachs claims that Greece might be headed for disastrous consequences if it bids farewell to the euro and attempts to rebound on the Greek drachma currency. Analysts informed investors in a note: “Transitioning from the euro to a new national currency is no straightforward task either for Greece or for Europe. Greece can’t just reintroduce a national currency.” Analysts further pointed out that Greece is under crucial threat if the exit goes ahead. The country faces tougher problems if it fails to comply with bailout conditions and makes an exit on both the euro and its debt. For one, the country would not be able to write off its mounting debt and would not even be able to convert it to Greece’s old currency of drachmas.

National Bank of Greece was up 0.79% in trading yesterday and leveled at $1.27 as markets closed yesterday.

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