Lines are wrapping around the block at ATMs throughout Greece as citizens wait to withdraw their money. A significant number of ATMs are already out of cash.
Last week, many thought that Greece and the IMF were close to reaching a deal, but Friday, things took a significant turn for the worse. Alex Tsipras rejected the latest proposal by the Troika and Angela Merkel said that there would be no deal under the current terms. With a June 30th deadline approaching to make a €1.6 billion Euro debt repayment, the country looks to be teetering on the edge of default.
A referendum on July 5th will give the Greek people a chance to vote on whether or not to remain a part of the Eurozone. Right now, there are thousands of Greeks rallying in the streets in favor of a “No” vote– a “No” would mean popular support for a Grexit.
While U.S. companies have limited exposure to the Greek economy and there are only a few Greek companies that are publicly traded on the NYSE, many investors are fearful that if Greece does vote to exit from the Eurozone, that other countries could quickly follow. Spain and Italy are believed to be the next two dominoes in line. U.S. stocks fell more than 200 points in early trading on the news.
The greatest immediate concern comes from other Eastern European economies. Officials from Bulgaria have said that a Grexit will likely negatively impact their country’s plans to join the Eurozone. Eastern European countries have greater exposure to Greek companies than Western Europe and the U.S.
New car sales in Greece have spiked in recent months and today, supermarkets in Athens are running out of food as Greek citizens have frantically tried to buy whatever they can with their remaining Euros. If the Drachma does replace the Euro in Greece, it is expected that the new currency could instantly lose 1/4 or more of its value as soon as it is issued.
Capital controls were put in place today in an attempt to stem the bank run. Citizens are only permitted to withdraw 60 Euros per day– that’s 1,800 per month. Not much. Greek Prime Minister Alex Tsipras has said that as of now, all deposits are guaranteed and that there would be no “haircut”. The most frightening outcome for the Greek people would be for their pensions and savings accounts to be confiscated in order to repay some of the debt.
If all of this sounds familiar, that’s because it is. Cyprus went through a similar situation in 2013. The country instituted its own capital controls as part of efforts to stem the outflow of currency from the country.
And in the past six months, Switzerland, Denmark, and Ukraine all experienced similar, albeit brief, currency crises. In January, Switzerland de-pegged the value of the Swiss Franc from the Euro on fears of a Grexit, causing it to spike overnight. This led to ATMs throughout the country to run out of Euros. After the Swiss de-peg, many Forex traders were betting that Denmark’s Krone would soon follow. The head of Denmark’s Central Bank issued a statement saying that the country would employ capital controls if necessary to support the Euro peg. That led to the Krone’s biggest drop in value since 2001 as traders moved en-masse to dump their holdings. In February, as the conflict began to heat up in Ukraine, the hryvnia fell by more than 70%, leading many Ukrainians to rush to the bank to exchange them for dollars, euros, or whatever other currency they could before their money became completely worthless. This also forced the country to close currency exchanges and institute rationing of basic groceries as Ukrainians rushed to their supermarkets to buy as much food as they could before it was too late.
Venezuela has also recently been hit hard by hyperinflation. The situation got so bad that earlier this year, the country had to broker deals to trade oil for toilet paper and tampons.
While the U.S. dollar is currently strong (some would say too strong), the potential for hyperinflation here at home remains a possibility. More than 1/3 of U.S. debt (over 5 trillion dollars) is currently held by foreign countries, the majority of it owned by China. Most economists agree that we will never be able to repay what we currently owe. When those debts come due, what will happen to the value of the dollar?
You probably remember that after 9/11, we had our own bank holiday. President George W. Bush called for markets and banks to close for three days while volatility decreased. It could happen again.
When the next crisis hits, do you want to be stuck waiting in line at the ATM, hoping that it hasn’t already run out of dollars? If the situation is bad enough, the ATMs might not even be turned on.