LONDON – Markets are already reacting to Greece’s rejection of Europe’s latest bailout offer, and it’s not pretty to watch.
The euro fell sharply after early results of a referendum Sunday showed Greek voters said “no” to the offer, backing their left-wing prime minister’s call to reject austerity.
The currency dropped by more than 1% against the U.S. dollar to trade at around $1.10.
The vote could trigger a series of events that leads to Greece becoming the first country to leave the euro.
Here’s why: Greece is on the brink of going bust. It urgently needs money to pay pensions and wages, and to reopen its banks — shut for a week already after talks with its creditors collapsed.
If Europe isn’t prepared to relax the terms it was offering Greece just last weekend, and there’s no indication it will, Greece will have to start printing its own currency soon.
The risk of fallout from Greece’s collapse directly hurting other European countries is relatively small. Most of its debt is held by governments who could cope with default.
But it will take the eurozone — the bloc of 19 nations that use the euro — into uncharted waters.
It also sets a bad precedent. Membership in the euro was supposed to be a one-way street. In fact, there’s no rule book to manage a member country going bust and crashing out.
It’s hard to imagine any other country choosing to follow Greece into the economic abyss, but some weaker eurozone economies may pay the price in permanently higher borrowing costs if a ‘Grexit’ materializes.
The uncertainty of the next few months could also weigh on European business confidence at a tricky time. The eurozone economy (except Greece) is recovering nicely, but investors are worried about the impact a slowdown in China will have on exports.
Central banks have been preparing for the worst. The European Central Bank unveiled a significant new weapon in its armory last week, when it said it may buy the bonds of a number of companies in vulnerable eurozone countries such as Italy, Portugal and Spain as part of its massive stimulus program.
