Worries continue to spread around the world with Greece using the Grexit as a final card against the members of the European Union. Some think that Greece is bluffing, while others are looking at it as a possible solution since the Greek debts went above 175% of the country’s GDP. Starting with the economic crisis of 2008, and for the past 6 years Greece has been fighting its way by applying austerity measures and bailouts, yet nothing has saved the country.
On the other hand, credit rating institutions have kept on downgrading Greece, leading to a decrease in investors’ confidence and a huge drop in bond prices, resulting in the increase in interest rates and borrowing, and the decrease in the country’s investments, culminating in a government deficit and huge debt.
But what effect will the Grexit really have worldwide?
If Greece applies its threats to the EU and exits the Eurozone, then it has to adopt the drachma once again; yet the drachma will have a low value this time, which means that a massive inflation will occur and deposits will outflow from the country, in which case Greece has to be ready to control outward transactions to keep the cash in the country.
The problems of Greece will not stop there!
As a country with a devalued currency, it will be bound to a huge black market with untaxed products and trades which will result in an extraordinary increase in inflation, something Greece cannot handle anytime soon.
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The euro dropped to its lowest levels for the first time in 9 years. With the ECB spending over 3 Trillion to support and maintain the Greek financial and economic status, the Eurozone will suffer a massive loss, as well as a huge distrust in banks will take place as people tend to learn from their past mistakes.
The European assets will also be placed in danger of losing value as the euro falls against other currencies.
The curse on the EU stock market and the negative effect that Greece will unleash on the small European economies in the zone will be of a destroying nature.
If Greece applies the Grexit strategy, then Italy, Ireland and Spain (The PIIGS) may need to use the same card, in which case the consequences on the EU will double in number and increase in size.
The US economy will officially pay the big fine for the Greek crises. The US exports in the Eurozone exceeds $275 billion making it the largest export market worldwide. A Grexit will basically mean a more expensive and unfeasible trade for the USA. This will also have a domino negative effect on both financial stability and the cash flow to the European Union.
The loan given to Greece by the French, German and British banks was insured by American banks, in which case Greece, by not paying back the debt and exiting the Eurozone, will cause the US banks to pay billions of US dollars to the European banks.
To sum up, if Greece opens the Pandora box then the consequences will cross oceans this time, shaking the strongest economies in the world and destabilizing the largest financial assets around the world. Traders must be aware and cautious of the possibility of Greece folding or Germany giving up on Greece and the Greek myth. At the end of the day, all loans given to Greece were insured.