Spain Bailout Shows Why Greece Euro Exit Would Lead to Eurozone Crisis


There has been much discussion in the past few months about the fate of Greece in the euro zone. 

Political junkies and hyperactive speculators seem to want to see "Grexit," the exit of Greece from the euro zone. The European Union, though, does not have a system in place for it; and, as such, the cost of a country leaving is unknown. 

In the case of Grexit, the cost could be substantially higher than keeping the country in the euro zone, and would even result in the disintegration of the Euro itself.

If Grexit were to occur, the Greek government would lose the bailout it received from Germany and the E.U. Banks will not be able to absorb the losses, and many will likely go bankrupt. Investors and bankers in the rest of the E.U., the European Central Bank as well as other governments who hold Greek debt on their balance sheets will face large losses.

Some countries, such as Italy and Spain, are not far behind Greece in liquidity and overextended debt. They are also holders of large amounts of Greek debt. If these countries were forced to absorb the losses incurred, the contagion of the debt crisis would spread to them. 

Anxiety from investors will lead to panic and those nations will need a bailout as well, or face economic ruin themselves. Unlike Greece though, any bailout for Italy or Spain will be astronomical, and they may actually be too big to save.

The Spanish government is at this moment negotiating a bailout for its largest banks, and Grexit has not even happened yet.

The anxiety of the debt crisis will cause another problem with the Euro itself, that risks a total collapse of the euro zone entirely. Once Grexit is complete, all Euros with the letter “Y” on it, indicating printed in Greece, will automatically become Drachmas, or whatever the new Greek currency will be named.

With Greece out, the above described contagion will spread to Spain, Italy, Portugal, and other insolvent countries. Investors will start moving money in larger quantities out of those countries and parking them in German banks, or buying German bonds for security. 

Many people are already doing this in anticipation of a potential Grexit.

Euros printed in Germany would be seen as more secure, and investors will want to park their money there in order to have access to those euros. By moving their money out, they are rejecting euro notes printed in Italy and Spain, and other countries.

Though the Euro is a single currency in name, these internal capital flights will result in Euros printed in different countries having different values. In essence, they will become different currencies, depending on what country ‘”letter” is stamped on each note. This means the euro zone will cease to exist as each country will end up having their own de facto currency.

Grexit will not save the euro zone, it will destroy it, and if its leading members want to save their own economies, they will do whatever is necessary to keep Greece in, at whatever cost.