What Can Investors Learn from a GREXIT?

With a new bailout plan agreed upon and further austerity measures on the horizon, it looks as if a Greek exit from the EU may have been averted for the time being.

Nevertheless, there are a few things that can be learnt from the recent Eurozone situation and talks of a possible Grexit.

Looking Back & Timeline

Looking back, severe cuts to government spending imposed by former Greek Prime Minister George Papandreou in 2009 proved to be inadequate in preventing a Eurozone bailout.

In May 2010 Greece was provided with a €10 billion bailout, and 2011 saw billions more provided to Greece on the basis that austerity measures will be put into place and spending would be cut drastically.

Despite these measures, Greece saw its fourth bailout in October 2012, with increasing unemployment and a spiraling debt burden becoming increasingly rampant throughout the country.

The Greek economy currently only constitutes around 3% of the total GDP of the Eurozone.

Unfortunately it appears as if Greece’s financial situation was already quite dire before entering the Eurozone, with a large amount of public debt and out-of-control public spending. Some even argue that the extent of this situation was downplayed or minimized in order for Greece to gain entry in the first place.

With the election of the anti-austerity Syriza party this year it seemed increasingly certain that the Greek government was not going to impose further austerity measures on its population.

Newly elected Alexis Tsipras’ argument was that the efforts and sacrifices made in order to resolve Greece’s financial situation was simply not worth the overall social and cultural cost.

Contentious Bailout Proposals

The proposals submitted by the Troika – consisting of the European Commission, the International Monetary Fund (IMF) and the European Central Bank – presented a number of issues for the new Greek government.

Tax increases and an end to numerous exemptions and discounts were among some of the sticking points.

Greece’s elderly population were also targeted by the Troika, with a proposed increase of the retirement age to 67, and a number of disincentives to be put into place to deter workers from early retirement.

Looking Forward to an Uncertain Future

Anti-competition laws and billions of euros of annual tax evasion continue to plague Greece, affecting its ability to recover and begin moving forward from its financial crisis.

What’s more, with businesses continuing to shut down across the country and tens of thousands of young people moving out of the country, the likelihood of Greece recovering in the near future appears slimmer and slimmer.

It looks as if investors would do well to be cautious of Greek interests for the foreseeable future; however, it cannot be said with any degree of certainty what is in store for Greece and its anti-austerity government.

Opinion from some quarters is that Greece needs to produce its own currency if it is to pay off its debts, and this will be devalued against the euro leading to cheap exports for the country. This could potentially result in a gradual growth and the beginning of a Greek recovery. Thus, the possibility of a Grexit, may have simply been postponed until a later time.

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