Why the world is watching a tiny nation vote once again

On Sunday,voters in Greece went to polls for the second time in as many months.

On Sunday,voters in Greece went to polls for the second time in as many months. The election is being seen as a referendum on the euro with Greeces future in the eurozone,and very possibly the EU,on the line. The outcome could determine whether Greece sticks with the heavy budget cutting that is required under the terms of an international bailout or rejects the fiscal austerity measures imposed on it by the rest of Europe. While most analysts are sure that the election may not lead to a quick resolution,what the polls are expected to do is to help determine whether the financial crisis that has plagued Europe for more than two years is coming under control,or is about to get much worse.

Why is the poll so important?

In March,Greece secured a second multi-billion-euro bailout package with loans and debt restructuring. It was accompanied with some tough austerity measures,such as cuts in public sector pay and pensions. The spending cuts left the economy in a deep downturn. Miffed by the painful spending cuts,Greeks turned away from the two traditional parties socialist PASOK and conservative New Democracy in elections last month and instead voted for more radical parties that have promised to pull the country out of its bailout and austerity agreements. But the problem is that if the country were to turn its back on the bailout terms,Greeces EU counterparts could stop offering the rescue loans. That could lead it to default and force Greece out of the eurozone a move that could greatly weaken the euro and shake up the global financial system.

What would a Greek exit from the euro mean?

There are no formal procedures in the European Unions rulebook for overseeing a countrys exit from the currency union. But if Greece were to exit,it would have no choice but to start printing its own currency the erstwhile drachma to keep the economy running. It would hit the Greek people hard and quickly,according to the Greek think tank Foundation for Economic and Industrial Research. The new drachma would lose half or more of its value relative to the euro. This would drive up inflation and whittle down the purchasing power of the average Greek. At the same time,the countrys economic output could drop,putting more people out of work where one in five is already unemployed. The prices of imported goods would skyrocket,putting them out of the reach of many. However,analysts say a weaker drachma would make Greek exports cheaper and more competitive and could help the economy start growing again.

What impact can it have on the global scene?

While Greeces economy makes up about 2 per cent of the eurozones overall economic output,the big worry is that if Greece were to pull out of the eurozone,investors will be wary about what happens to other troubled and larger EU economies. The panic in market sentiment is about Grexit the term being used to describe Greece leaving the Eurozone being followed by possibly Spains pain,Italeave and Portugalout. That fear would likely drive up borrowing costs for these and other countries,potentially to levels that would require them to seek more bailouts. The fear of a default actually drives a country closer to default. Europe would be trapped in a vicious circle.

The European banks that hold much of the continents government bonds would become significantly weaker and more reluctant to lend to one another. This could spark a credit crunch like the one that followed the collapse of the US investment bank Lehman Brothers. This problem could be made worse by savers and investors taking money out of banks in shaky economies and moving it to safer countries such as Germany or even out of the eurozone altogether. This could further destabilise the banking system.

Who among the rest is struggling the most?

Spain has become the latest,and the biggest,eurozone nation to ask for a bailout. Its borrowing costs have shot up over the past weeks on concerns that it does not have the money to prop up its troubled banking sector,which has been crippled by a collapse in its property market. Last week,the Spanish government admitted it would seek outside assistance for its banks after the eurogroup finance ministers from the 17 euro countries agreed to offer Spain 100 billion euros in bailout loans. Spain will decide how much it needs once independent audits of the countrys banks have been completed.

What are the stands of Greeces contesting parties?

Alexis Tsipras,leader of the radical Syriza party that came second in the May elections on an anti-bailout agenda, has vowed to cancel Greeces international bailout agreement if he wins. Both PASOK and New Democracy have vowed to try to renegotiate parts of the bailout in an effort to stimulate Greeces flagging economy,but neither advocates pulling the plug on the deal and insist the top priority is to keep Greece in the euro something most Greeks want.

What are the odds of Greece exiting the euro?

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Standard amp; Poors has said Greece has a one-in-three chance of exiting the euro. However,the rating agency has ruled out a domino effect stating that a Greek exit would encourage others to stay on. We do not foresee any political party attaining power in the Eurozone periphery that would support a eurozone exit. We believe that the hardships the Greek population would suffer were Greece to exit would dissuade any other member state from following suit, Samp;P said in its June report.

Is there an impact on India?

The crisis in Europe has fuelled a rush among major global investors to move to safer investment destinations such as the US. This has led to a flight of US dollars from emerging markets such as India,resulting in the rupee depreciating. A Greek exit would push up the dollar vis-a-vis the euro and other currencies,including the rupee.