Most of what you have read about the consequences of a Greek euro exit in the last while has been a mixture of speculation, conjecture and guesswork. If Greece leaves the euro, there is no template to work from, no playbook from recent history to suggest how things might actually pan out or what the long-term consequences might be. Legally, operationally, financially, this is the definition of that cliche beloved of journalists when they have no idea what will happen next – uncharted waters.
Why should I care, you might ask. Well, if you are heading to Santorini or Ios for a few weeks, I would bring plenty of cash – just in case the ATMs stop working. Beyond that, if you ask the question – what would Grexit mean for us in Ireland, it is impossible to answer with any precision. However while the "sure it would be grand" approach being pedalled by the Government is probably the right thing to do in public, you would hope that behind closed doors, Ministers don't entirely believe their own "spin".
Shorter-term risk
The shorter-term risk of a Grexit for us is that it could upset a backdrop that is remarkably favourable to a small country emerging from an economic bust. We are reaping huge benefits from the rock-bottom interest rates at which the State can raise money, the willingness of international investors to put their money here and some pick-up in international growth.
Europe has firewalls – and firepower – to try to limit the short-term impact of a Grexit. The ECB is in the middle of a €1.1 trillion programme of buying government bonds, which should help to hold long-term interest rates down. Grexit though could knock confidence and international growth, inevitably affecting our prospects.
We would also be looking at a period of market instability, with an impact for investors, pensions funds and so on – and uncertainty has a habit of slowing investment flows, whether by businesses or investors, which have been a key factor in our revival. Investors have embraced risk over the past couple of years to try to get some return on their money – if their mindset changes, less could flow into our economy and government bonds.
It is impossible to put any order of magnitude on this. Yes, it is quite possible that our recovery could continue, albeit in choppier international waters, but we really need a couple more years of ultra- low rates and decent growth to try to solidify our national economic position. More upheaval and uncertainty is the last thing we need.
In the wake of a Greek euro exit, I would not expect the kind of immediate country- by-country attack we saw in the markets during the 1992 currency crisis, when investors broke apart the links national currencies had in the old EU exchange rate mechanism. After all, unlike then, there are no national currencies to attack. This time around, the government bond markets would be the place to watch and investors would be taking on the ECB and its vast firepower.
However, the cost of borrowing for the State has already risen from its all-time low reached in April and could go higher – along with the costs faced by other peripheral countries. Fortunately we are sitting on a huge pile of cash in our national coffers, so can certainly ride out any short- term uncertainty, with no pressure to raise fresh borrowings for some months.
In the longer term, however, Grexit would put the obvious question in the minds of investors lending to euro-zone governments. If one country has left the euro, how can we be sure that, at some stage, others won’t follow? Any country seen as vulnerable, even in the long term, will pay more to borrow.
At the moment, when investors lend Ireland money, they charge us interest rates lower than Portugal, Spain and Italy, but still a bit higher than the second rank of "solid" EU countries, such as Belgium and Finland. We are the euro "inbetweenies". This is not just "markets" stuff: every percentage point extra we pay on our national debt costs our budget not far off €2 billion a year, more than the expected €1.5 billion leeway we have in the 2016 budget.
Fiscally righteous
We have succeeded in persuading the markets that “Ireland is not Greece”, but to really underpin our public finances for the future – particularly if uncertainty builds – we need to persuade them that we are boring, fiscally righteous northern Europeans.
This calls for caution as we approach budget 2016, rather than the pre-budget giveaway which is in the offing. After all, even if a Greek deal is done, it will probably only cover a few months’ extension to the second Greek bailout – six months is the gossip – with the prospect of negotiating a full third bailout programme still to be tackled. More uncertainty could lie ahead.
It will be an interesting weekend. Such are the huge risks and uncertainties that both sides would face if Greece left the euro, a deal could be done, either on Monday or in the following days.
For Greece, the key pressure is now in the banking system – just as it was for us when we gave the bank guarantee in September 2008 and, two years later, entered the bailout. And, just as with us on both these occasions, the ECB is a key player and is now deciding whether to keep the banks open.
No deal over the next week and a Greek default would raise immediate questions over Greek euro membership and – unless things could be patched up in the weeks ahead – raise new questions for EU leaders about what help they will extend to Greece as it crashes out of the single currency.
It would be a mistake to underestimate the chaos this could all create.