Home >money >personal-finance >Greece is a chronic defaulter

The Indian stock market opened sharply lowered on Monday as Greece moved dangerously close to a default and exit from the European currency union.

As talks failed between the Greek government and its creditors over the weekend, the country has decided to the shut banks and stock market for now in order to avoid an immediate collapse. “Banks will be closed and the stock market shut all week, and there will be a daily €60 limit on cash withdrawals from cash machines, which will reopen on Tuesday. Capital controls are likely to last for many months at least," said a Reuters report on Monday.

It’s not for the first time that Greece finds itself in trouble. In fact, financial crises have been a feature of its history. According to the data mapped by Carmen M. Reinhart and Kenneth S. Rogoff in their 2010 paper From Financial Crash to Debt Crisis, Greece has witnessed five external defaults since 1826 and has once defaulted on domestic debt. It has also seen two banking crises, starting in 1931 and 1991.

On the external front, Greece was in default during the periods 1826-1842, 1843-1859, 1860-1878, 1894-1897 and 1932-1964. Consequently, between 1829 and 2009 (the period considered in the paper), Greece has remained in default 48.1% of the time. Its internal default was between 1932 and 1951.

Therefore, one of the biggest incentives for Greece to join the single currency union was the promise of stability in its financial sector. But nothing of that kind happened. After it joined the union, interest rates converged with rest of the Union and Greeks went on a spending spree. It was also discovered that Greece was consistently under-reporting its debt and deficit numbers. As a result, it now has a broken economy that cannot repay the debt, which is 180% of the gross domestic product. In case a solution is not found in next few days, Greece will default for the sixth time since 1826.

A default would mean an extremely turbulent future for Greece. “Failure to reach an agreement would… mark the beginning of a painful course that would lead initially to a Greek default and ultimately to the country’s exit from the euro area and—most likely—from the European Union. A manageable debt crisis, as the one that we are currently addressing with the help of our partners, would snowball into an uncontrollable crisis, with great risks for the banking system and financial stability. An exit from the euro would only compound the already adverse environment, as the ensuing acute exchange rate crisis would send inflation soaring," said the 17 June monetary policy report by the Bank of Greece.

“All this would imply deep recession, a dramatic decline in income levels, an exponential rise in unemployment and a collapse of all that the Greek economy has achieved over the years of its EU, and especially its euro area, membership. From its position as a core member of Europe, Greece would see itself relegated to the rank of a poor country in the European South," it warned.

A default will not only hurt Greece but will also lead to confusion and volatility in global financial markets. A default will pose questions about the survival of the European monetary union.

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