Greece could still face a total banking collapse, even while remaining in the European monetary union, warns Lombard Street Research.
Jamie Dannhauser, an economist for Lombard Street Research, says the main impact of austerity measures is a “collapse in confidence that lies at the heart of what could soon be a systemic banking crisis”.
The Greek economy is now 13% smaller than it was at the start of the financial crisis, having contracted in 10 of the past 12 quarters, while labour costs have risen 10%.
Not only is Greece unlikely to meet the International Monetary Fund’s deficit reduction target of 1.9% of GDP by the year end, but the balance sheet of the private sector is also in serious deterioration.
Deposits held by the private sector have shrunk to approximately €239 billion (£205 billion) while lending costs have soared to around 7%, for those who can even gain access to the market.
As both the private and public sectors have become squeezed by the austerity measures, banks have attempted to boost their balance sheets at the expense of curtailing lending to businesses, he says.
“Private non-financial debt was 105% of GDP at the end of 2007. It is now 125% of GDP and heading north at a rapid clip, as national income shrinks.
“Total non-financial debt (ie private and public sector) is bordering on 300% of GDP, compared with 220% four years ago” adds Dannhauser.
“The Greek economy has not merely fallen off a cliff. It long ago went crashing into the rocks beneath” he adds, predicting that Greece could exit the monetary union within twelve months.
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