3 Reasons Greece Could Default Without Grexit -- Barron's Blog

        By Dimitra DeFotis
        Three case studies illustrate that Greece could default on its debt and remain in the Eurozone.
        Moreover, Greece doesn't have to bring back the drachma if it defaults, say Jeffrey N. Saret and Alex Dementiev, analysts at Two Sigma, a quantitative hedge fund with $25 billion in assets under management based in New York. They acknowledge that Greece is running a deficit, but they insist the market isn't giving Greece credit for structural reforms that have created a surplus when you subtract interest payments from the fiscal budget. That's the whole point of course -- Greece owes creditors billions in June alone.
        But, as Wolfango Piccoli, an analyst at Teneo Intelligence pointed out this morning, polls consistently indicate that around 70-75% of Greeks want to remain in the Eurozone. Here are the cases:
        Case 1: During the 1820s and 1830s, growth was booming as barges sailed down new canals with financing from an expanding banking system. The system created intra-state markets and a unified economy, much like the Eurozone, but also resulted in excessive debt. The territory of Florida, Mississippi, Arkansas, Illinois, Indiana, Maryland, Michigan, Pennsylvania and Louisiana defaulted. Five didn't pay, two started to pay but a decade later, and two repaid creditors in full. There was no central bank but all the states remained in the U.S. currency union.
        Case 2: Panama, which like Greece relies on tourism and has an historic reliance on the maritime industry, uses the dollar as its national currency. It has the balboa, but it equals the dollar in value. Saret and Dementiev write:
        "By adopting the U.S. dollar, Panama enjoys inflation rates on par with the United States and far below its Latin American peers. Panama also benefits from lower cross-country transaction costs. However, Panama's inability to print money on demand limits its fiscal flexibility, and the country has required frequent IMF intervention. Panama's financial system cannot call upon a lender of last resort, so it has relied instead upon foreign banks.
        Were Greece to default on its debt, and if the ECB declared that it would not underwrite Greek banks, Greece could still retain the euro as its official currency ... the European Union already grants Greece the ability to access non-Greek banks. ... In short, the ECB cannot force Greece out of the euro zone any more than the United States can force Panama to stop using the U.S. dollar."
        Case 3: Cyprus. The Greek side of the island is in the European Union, and imposed capital controls on depositors 2013, sought a bailout from the European Central bank and the International Monetary Fund. While this was painful for those with assets in Cypriot banks, it was effective, Saret and Dementiev argue, concluding:
        "The alternative of converting euros to a new currency might be worse for Greek savers ... Changing currencies is a choice only the Greek government can make. A sovereign default may prove the impetus to such an action, but it will not force the government's hand."
        Eurobank Ergasias ( EGFEY) fell 4.2%, the National Bank of Greece ( NBG) fell 5.2%, Piraeus Bank ( BPIRY) fell 6.8% and Alpha Bank ( ALBKY) dropped 8.8%. The iShares FTSE Greek 20 ETF ( GREK) fell 4.4%.
        (END) Dow Jones Newswires

        June 16, 2015 17:29 ET (21:29 GMT)

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