What is certain….is that the measure would have a disastrous impact on the European economy.
“The currency conversion would lead to capital flight,” they write. And Greece might see itself as forced to implement controls on the transfer of capital to stop the flight of funds out of the country. “This could not be reconciled with the fundamental freedoms instilled in the European internal market,” the paper states. In addition, the country would also be cut off from capital markets for years to come.
Yves here. This “you’ll never borrow again” threat is greatly exaggerated. In fact, investors like borrowers who have cleaned up their balance sheets. That’s why Chapter 11 works. Argentina’s default and end of dollarization proved salutary, with the country now performing better on virtually every economic indicator than its Latin American peers. The big difference is that it did not have to recreate a stand-alone currency, which would be a huge operational hurdle for Greece. Back to the article:
In addition, the withdrawal of a country from the common currency union would “seriously damage faith in the functioning of the euro zone,” the document continues. International investors would be forced to consider the possibility that further euro-zone members could withdraw in the future. “That would lead to contagion in the euro zone,”
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