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Greeks stay In

Submitted by Bruce Krasting on 05/08/2011 10:10 -0400

The Der Spiegel article on Friday kicked up a stir. The magazine
reported that the possibility of Greece abandoning the peg to the Euro
was being seriously considered. Over the weekend we find that there is
little truth to the Spiegel claim.

J.C. Juncker (EU finance minister) had this to say:

“We’re not discussing the exit of Greece from the euro area. This is a stupid idea -- no way.”

The Greek finance minister, Papaconstantinou chimed in with:

Public debt would double, consumer spending power would be “shattered” and the country would sink into a “war-like recession,”

Okay, so no exit for Greece. Panic over for the time being. The conclusion is that once one joins Club Euro you can’t quit. Ever. Ever? That seems like a long time.

There would be a lot of pain for Greeks if the country
decides to step outside the fixed peg of the Euro. Debt would soar in
value as the old Drachma is introduced. Social payments that now are
denominated in Euros would also cost the state much more. As a result
all Euro denominated fixed liabilities by the state or the private
sector would have to be restructured. That would entail big losses for
many EU banks. It would also crunch the local Greek banks and many of
the Greek citizens who hold the bonds.

But hold on a second. Aren’t all those bad things happening already?
The holders of Greek debt are looking at TV screens and everyday they
are reminded that their assets are trading at 50-60 cents on the
dollar. The Greek economy is in the dumpster. It has been for years and
it’s not going anywhere as long as this crisis lasts. Greek citizens
are seeing round after round of cutbacks, but no progress is being
made.

Were it not for the ECB providing short-term support, Greece would have
gone belly up a long time ago. The folks in Brussels know that the
support necessary to keep Greece afloat will have to be in place for at
least another decade. The cost to the big countries in the EU is going
to be a non-stop political headache for years to come. There is
absolutely no possibility that the Greek economy can grow and prosper
given the status quo. So who’s kidding whom when it comes to the pain? Everyone involved is already bleeding pretty badly. How worse could things get?

I think the Greeks should have exited from the Euro a long time ago.
They hitched their future to a strong horse and they simply can’t keep
it up any longer. I think there is no alternative but for Greece get on
with life and move on. To stay stuck in the mud for another ten years
is a dumb plan. When individuals, corporations or countries make
mistakes they have to ultimately suck up to reality and change
direction. Call that a bankruptcy if you like, but that is what is
necessary.

Consider the exchange rate implications of where we sit today. In June
of 2000 Greece formally adopted the Euro and gave up the Drachma. The
official fixing of the rate was at 340.75 GDR per Euro. On the date of
this fixing the EURUSD FX rate was .9500. Where are we on that today?

At 1.43 EURUSD the Euro has appreciated by 50% since 2000. The Greek
economy is tied to this horse, so the result is that the county is no
longer competitive. Its death is assured, but death has been kept at
bay by the life sustaining measures of the ECB. It isn’t going to work
for much longer. And I think that all the parties at the table are
aware of that. Too bad they don’t have the guts to admit to the ‘Euro mistake’ and turn back the calendar.

All the leaders of the world are spouting the language of a market
driven economy. But it seems that all these same leaders spend all of
their time trying devise ways to thwart the same market forces they
claim to uphold. I can’t think of a single Euro ‘decider’ who has not
spoken out against the Chinese and their policy of maintaining an
artificial level for the CHY. But the same folks ignore that same
conclusion when it comes to Greece. Is that hypocrisy or stupidity? I think it is both. What is the future if it is just a perpetuation of the mistakes of the past?

Note:
While looking up some old FX numbers for this piece I happened to check
the USDCHF rate for June of 2000. Does USDCHF at 1.64 sound a bit odd?
That’s 86% higher. As noted above, the Euro is up only 50%. The
difference of 36% is the market’s perception of the Euro’s value as a
store of wealth via the CHF. This difference would not be so dramatic
were it not for the dead weight on the Euro that the weak peripherals
bring.

At some point the weak countries will break the Euro link. It’s a bond
that can’t be sustained much longer. The prevailing wisdom is that the
process of a Euro breakup is bad for the EURUSD fx rate. The price
action late Friday confirmed that (again). I suspect that at some point
the psychology will shift. When the weak sisters are jettisoned (for
their own good) it will leave a stronger core. The currency for that
core has a value much higher than the Euro does today versus the
dollar.

When the FX market trades the EURUSD higher on the news headline, “Emergency EU meeting this weekend re: Greece”
you will know that the endgame is closer. The way the market
knee-jerked traded the EURUSD lower on Friday is just a confirmation
that the ‘extend and pretend’ games for the peripherals is still the
favored outcome. That’s not likely to last much longer. I doubt the
market will wait till the end of the year.

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Sun, 05/08/2011 - 22:14 | 1254406 I did it by Occident

“We’re not discussing the exit of Greece from the euro area. This is a stupid idea -- no way.”

wait a minute, if Juncker is anything like the US crack commando economic team (bernanke, Geithner), doesn't "No way" mean "definitely!" ?

So I expect the story to change within a month or so "ummm, we may consider a Greece exit..."

Sun, 05/08/2011 - 22:04 | 1254378 Bartanist

The Germans like little Greek slave boys.

Sun, 05/08/2011 - 20:55 | 1254242 old_turk

Bruce you state, " The conclusion is that once one joins Club Euro you can’t quit. Ever. Ever? That seems like a long time."

Obviously, this would be the Hotel California solution, wherein, 'you can check in any time you want, you can never leave'.

Never, ever, say never. Yea, it's a long time but as political scenarios and the balderdash of central bankers goes, it would be somewhat better to scratch the whole thing and start over.

Just sayin'.

Sun, 05/08/2011 - 19:00 | 1253990 Al89

Hardest thing for people to do is admit fault. Greece leaving would be Juncker, Trichet etc doing just that re: bailout policies and even letting Greece in to the Eurozone in the first place. So you can pretty much bet on them playing the extend and pretend game for so long that when this does come down it won't just be Greece/Ireland/Portugal going, but it might well be the entire house coming down.

Sun, 05/08/2011 - 18:26 | 1253923 PulauHantu29

I read the wealthy are moving Billions of Dollars out of Greece:

http://www.guardian.co.uk/world/2010/feb/07/greek-rich-pull-out-billions...

I guess they don't like "austerity"...namely, austerity for YOU but not the banks.

Sun, 05/08/2011 - 18:20 | 1253902 tom

By current EU law, it is impossible to exit the Euro without also exiting the EU. No joke, look it up.

Leaving the EU and Euro brings other costs besides the ones you mentioned. Greek exports to the EU would be tariffed. But in return the Greeks could collect duties on imports from the EU. Politically primitive countries like Greece tend to have a much easier time collecting import duties than taxes. That may go a long way towards explaining why Greece went bankrupt within the EU.

On the other hand, there is actually an option to leaving the Euro and EU that you didn't mention. The government could mandate a massive, at least 40% I'd say, reduction in salaries, wages and benefit levels. Accomplishes the same thing as a 40%+ devaluation.

Yes GDP shrinks by close to the same amount. Yes the debt also becomes effectively bigger, just like a devaluation. But so what, that debt needs to be wiped out anyway.

Sun, 05/08/2011 - 17:34 | 1253807 Believable-Hypocrite

"Tax avoidance is the national sport. Anything of value in the economy is transacted via the black market. Bloated Gov't unions are kept bloated to preserve the autocrats."

Truer words can not be spoken. They have it down to a science.

Sun, 05/08/2011 - 17:26 | 1253782 DeltaFunctionToronto

It's not that the exit of Greece is an unwise idea; rather, it is an unwanted circumstance.

The most widely misunderstood topic of conversation that takes place on this forum occurs with regard to the Euro, and the motivation behind its formation.

The height of instability in the Euro is now behind us, and thus continued consolidation can be anticipated.

Sun, 05/08/2011 - 19:44 | 1254085 Orly

Sponsored by the American taxpayer...

Sun, 05/08/2011 - 17:22 | 1253770 Milestones

We either do the whole "One World Order" (government) or Marshall McLuhan's retribalization or some slight realignment. We must either decentralize or face 1984 full in the face. This will involve a massive loss of life I fear.

Like it or not, a new paradign is upon us and we are ill prepared to meet it. The future is, I am afraid, virtually tomorrow. Milestones

Sun, 05/08/2011 - 19:19 | 1254033 The Alarmist

Meet the new boss ... same as the old boss.

Sun, 05/08/2011 - 16:15 | 1253595 IdioTsincracY

In light of the fact that several European countries do not want to pay for further bailouts, Greece has only two options:

exit the Euro
wait until runs out of money

Greeks better grow some b@lls and do away with corrupt politicians and the economic oligarchy.

Sun, 05/08/2011 - 16:41 | 1253657 Gordon Freeman

Why should they? Their lives have been sinecures under the EU's "rules". The idea that the average Greek is suffering is ridiculous: they are well-fed, have nice cribs, cars, TVs, money in their pockets, etc.

There will be no significant change. Greece has been in default 50% of the time, over the years. To them, a national default is about as important as losing an important soccer game. Actually, it's not even that important...

Sun, 05/08/2011 - 15:13 | 1253440 delivered

Extend and pretend. Deny and then lie. Just more BS coming out of the EU attempting to buy time and figure out a way to develop a plan for an impossible situation. So Greece buys another day, week, month, year, or whatever, it will end up eventually going BK. Just no way the math works anymore with these kind of debt loads. So after Greece, then Ireland, Portugal, Spain, Italy, the UK and eventually, the USA. The West has spread so much paper around that nobody knows how to get out of this mess other than by issuingmore paper (currency or sovereign debt, no real difference), structuring another bailout, restructuring a previous bailout, and then changing the terms of the game in mid stream in one last hope of solving the problem.

BTW, last week there was a story by ZH referencing Credit Suisse on why Greece didn't need to go BK now (as the country has ample availability left with the ECB deal, would risk losses to domestic holdings, etc.). Either CS has a trade exposure they need to capitalize on or they no nothing about filing BK. To my later point, you always want to go into BK with capital/hard currency to implement a plan that gives you a fighting chance to survive. If you wait until everything is spent/exhausted, then a chapter 11 BK (reorganization) quickly turns into a chapter 7 BK (liquidation) with only the vultures remaining to pick the bones clean. Maybe this is really the end game of TPTB and is a means to suck whatever remaining wealth exists.

I would agree with Bruce that Greece has probably reached a point where the country needs to take its pain all at once and clean house. As for the domestic holders of Greek debt, well let's just say that I have a feeling that these groups will be given "priority" status with any BK process whereas the external holders, similar to unsecured creditors, will get the shaft. Doesn't matter what deal has already been cut as when a country's sovereign status is at risk, the rules of the game can quickly change.

Sun, 05/08/2011 - 14:44 | 1253343 ISEEIT

The early FX is in and the $$ trade is upside EUR/USD. I see 1.45 by the middle of Asian session.

Sun, 05/08/2011 - 14:51 | 1253365 Orly

Keep in mind, these are the same guys who "knew" something was coming. Watch them devastate the longs lower, then brutalise the shorts before the reversal.

Money for nothing and the chicks for free.

Sun, 05/08/2011 - 14:41 | 1253334 AG BCN

great use of a "Banksy"

Fully appreciated by me. Unfortunately some f*ckwit destroyed it last November.

Sun, 05/08/2011 - 14:32 | 1253306 Mr Lennon Hendrix

Bruce, any possibility that Greece could adopt a currency already in circulation? I would figure they would want a weak one, like the dollar, but maybe they could use the Swiss Franc? Or better yet, could they go to the Drachma and back it with gold, and silver? I know this is outlandish (except for backing the Drachma with gold, that is brilliant), but desperate times call for desperate measures.

Sun, 05/08/2011 - 17:09 | 1253739 Bruce Krasting

They need their own currency IMHO. Certainly not the CHF, that would just compound the problem.

Sun, 05/08/2011 - 14:25 | 1253298 Clowns on Acid

Bruce - nice article. To be fair the Euro came out at 1.1750, so at 1.43 and change it is up approx 20%, from the historic lows approx 40%.

In any case Greece has been a basket case for 100 years and continues to be one. This what de facto socialism / fascism does. The educational system in Greece does not teach nor encourage sciences or engineering. Tax avoidance is the national sport. Anything of value in the economy is transacted via the black market. Bloated Gov't unions are kept bloated to preserve the autocrats.

No Euro bailout policy nor "budgetary constraints" will change this, these are merely a speed bumps (going down hill) at best.

The ECB will continue to slowly tighten the screws to a point where the Greeks themselves will opt out. As will Portugal, Italy, and Spain. Spain will become the "new Germany" of the Club Med Euro. The Euro debt of these countries will be converted to their new Club Med currency at a 50% haircut.

Like the old European EMS currency structure, the Greece, Italy, Spain, and Portugal all would devalue from the official peg pretty much every 2 to 3 years. It will no different this time albeit, this time they will have to go through the agonizing process of creating a new currency.

This will not happen however until there has been a lot of pain and economic depression (despite continued Euro printing).

I place a 1 to 2 year timeline on this. Indeed the "Euro" will strenghten once this inevitable event begins to creep out of ECB meetings.

Sun, 05/08/2011 - 17:07 | 1253740 Bruce Krasting

The Greece link came in 2000 so I measured from then.

Sun, 05/08/2011 - 16:34 | 1253632 Gordon Freeman

Not a chance. If anything happens, it will take far longer to play out. It will happen in little dribs and drabs, and people won't even notice it, except as a general malaise with their own economic lives. Just like the average person has no real sense of what has happened to the dollar's purchasing power, this frog will boil no differently than all the others...

Sun, 05/08/2011 - 14:18 | 1253280 takinthehighway

Bruce, thanks for all that you do.

Thinking back to your post the other day about the dam near your home...have you ever considered that dam to be symbolic of America? Her former productivity and drive, and the grandeur that followed, now awaiting outside help to restore her strength and vitality?

Mon, 05/09/2011 - 06:26 | 1254827 Bruce Krasting

That dam is going under a two year construction project starting any day now. The plan is to raise the water level by 4 feet. That is a very big dea as this is 21 miles long and a half mile wide. That comes to a lot of water.

Why all the effort? Because the main supply of water for NYC is far upstate. It provides water through a tunnel that goes under the Hudson river. That tunnel is leaking big time. Estimates are 100m gallons a day are leaking. The repairs will take two years. The water source will be lost to NYC during that fix. So first the have to create more storage in Croton. A very big infrastructure project.

But the reason is that the old tunnel is 100 years old. Like so much of our infrstructure, it is falling apart.

Mon, 05/09/2011 - 06:28 | 1254825 Bruce Krasting

But the reason is that the old tunnel is 100 years old. Like so much of our infrstructure, it is falling apart.

Sun, 05/08/2011 - 14:15 | 1253270 Orly

I see a big bounce coming in the Euro.

Just as the silver market was manipulated to the extreme at the end of last week, I see the same thing happening in the 4X markets vis-a-vis the Euro (actually, the DXY...). Der Speigel is part of the owned lock-stock-and-barrel MSM, is it not? Funny how a German newspaper can print clear falsehoods, denied by everyone only hours later and have the market just tank. Someone knew something somewhere...obvious in retrospect, isn't it?

The Great British Pound Sterling didn't even budge on the news, then actually ran higher. All of the losses on this "news" have been greatly rectified, except with the Euro.

Tyler had said on Friday that the Euro is expected to gap down this evening a full two hundred-pips. If true, that takes the level to near the lower Bollinger Band on the daily chart. Once the Euro reaches and breaches that level, there could very well be a strong up-shot that may take the EURUSD pair to Goldman's intial target of 1.5.

Once the pair falls to ~1.413, watch for signs of a strong reversal. The move could easily pull the AUDUSD higher along with it (very, very likely, in fact...). The key tell of the week will be the British inflation report at 0530 on Wednesday. When British inflation comes in hotter than expected, all three pairs are likely to shoot the moon.

Or not...

Olexsandra

Sun, 05/08/2011 - 15:19 | 1253456 Jack Sheet

I tend to agree - is it not so that any defaults, bond haircuts or exits of PIIGS from the EUR are deflationary and should therefore be bullish for the EUR/USD.

Sun, 05/08/2011 - 18:02 | 1253861 Orly

My point is that they are going to try to ramp the GBPUSD higher as long as they can and carry the EURUSD/AUDUSD along with it. I think the GBPUSD tops at ~1.677-ish, then it's look out below for all of them.

Back in the day, the Bank of England and all her co-horts failed. They are trying to re-inlate it as much as possible before slowly letting air out of the balloon. Final target on GUBUSD short will be ~1.15...but we'll see when we get more details.

Until such time, keep in mind that they are going to try to ramp it up as best they can and with whatever means necessary.

Sun, 05/08/2011 - 19:06 | 1254003 Orly

Wow. No gap at all anywhere today. Go figure.

After such massive moves last week and the market opens like it's Fourth of July weekend, 1989.

Spooky.

Sun, 05/08/2011 - 14:33 | 1253318 Orly

By the way, if you're still riding the USDCHF long, it will also continue higher but watch for the whipsaws as the Euro readjusts.

The USDCAD long trade is still on and going strong. Watch for some sideways action before continuing in a stronger mode. Oil could be in for some come-uppance. Upside target still 1.01.

Mon, 05/09/2011 - 05:45 | 1254806 falak pema

you sound too sexy and intelligent on currency plays to be true. You must be french like sauce au poivre...or some brand of Chanel.

Sun, 05/08/2011 - 13:36 | 1253164 Moe Howard

Bank error in my favor. Collect $200.

Sun, 05/08/2011 - 13:30 | 1253150 topcallingtroll

Can we now all refer to the big german bank as Douche Bank?

Sun, 05/08/2011 - 13:29 | 1253147 adonisdemilo

any options/proposals put forward by the banks will not be for the benefit of the greek people, or any other peoples. the ruling elite have to keep this political charade going at all cost, as long as the cost is borne by the debt slaves

any and all options/proposals are ONLY for the benefit of the banks

cut the cord now, tell them all to fuck off, you'll struggle for a couple of years but it's better than a lifetime of debt slavery.

you'll survive

Sun, 05/08/2011 - 13:16 | 1253125 Buyemall

Greece is definitely undervalued, and that will be more obvious by the second half of this year.

Sun, 05/08/2011 - 13:33 | 1253163 topcallingtroll

I admire your big balls and wish to examine them a bit.

Your statement indicates that

The german constitutional court will allow a blatant violation.
The EMU treaty will be amended to allow bailouts and monetization of individual country debt.
Right wing parties dont throw sand in the gears.
The Greeks actually quit cheating and lying and start meeting targets without manipulation.

Mon, 05/09/2011 - 05:41 | 1254803 falak pema

Or...China buys Greece and greek debt. Like Brazil does in Portugal...through indirect routes which stay opaque as ECB fronted...big Deutsch-Merkel-Euro Oligarchy play...That's what empires are for...

Mon, 05/09/2011 - 05:39 | 1254802 Roger Knights

"Your statement indicates that the german constitutional court will allow a blatant violation."

Does anyone have any idea when that court will issue a ruling on the matter? That could be a real black swan if people are unprepared for it.

Sun, 05/08/2011 - 13:09 | 1253099 Hephasteus

EURO bunch of broke nations co-signing each others loans. Look at the yeild curve they all had the same yeild and same bond market reactions for the ENTIRE EURO now they are puking out individual rates.

Sun, 05/08/2011 - 13:05 | 1253096 Azannoth

This situation has obviously nothing to do with sound judgement or economics it's all political, the global elites Need a EU with an Euro so they can sooner or later merge it with the North American Union and have a global government, a recession is a small price to pay for a Global Empire

Sun, 05/08/2011 - 12:48 | 1253055 tim73

"At 1.43 EURUSD the Euro has appreciated by 50% since 2000. The Greek economy is tied to this horse, so the result is that the county is no longer competitive."

The original value was set to 1.20 and it went all the way down to 0.89. So your statement is not true.

Sun, 05/08/2011 - 19:54 | 1254101 Roger Knights

"The original value was set to 1.20 and it went all the way down to 0.89. So your statement is not true."

His statement was that the eur/usd has appreciated 50% since 2000. On their face, neither of your facts refute that.

Sun, 05/08/2011 - 12:45 | 1253037 BernankeHasHemo...

Ask yourself, who profits from the existing situation? Then you have your answer: the banks. All over the world it's the same. The only solution is for the masses of people screwed over by this to buy an AK47 and a lot of ammunition. You have a million guys in Athens (or Washington DC) with AKs and nothing to lose and we'd be on our way. Of course what are the odds? The masses would rather die slow deaths than a quick one even if the quick one promises the end to their miseries.

Sun, 05/08/2011 - 14:23 | 1253283 captain_menace

The logistics associated with mobilizing a million amateurs with guns, all towards a common purpose is truly frightening. A group like that would need to be led, and my guess is that it wouldn't be hard to corrupt whatever leadership materialized.

My money is on TPTB... that is of course... if I had some money.

Sun, 05/08/2011 - 12:58 | 1253075 Gordon Freeman

I have lived a long time, in many parts of the world. My experience is that powerless people never speak truth to power--they are too concerned with saving their own skins, and are cowardly, in most respects. It is romantic and comforting to think "the masses" in the West will soon rise up, and throw down the misrule of the bankers--but they will not, not until they have nothing to lose. To most of these people, they still have a great deal to lose, at least as they perceive it.

Settle in--I would say we are maybe at the end of the first inning...

Sun, 05/08/2011 - 13:35 | 1253169 Moe Howard

Exactly correct. They will not revolt until they are starving, and then they will be too weak to revolt.

We have a government that goes to war without even a vote.

We have a 'president' who can't even produce a birth certificate or passport that isn't phony.

We have the executive branch being used to loot the treasury and the taxpayer.

Our wealth is being stolen through endless moneyprinting.

Nobody speaks up. Nobody demands action.

We are fucked.

Sun, 05/08/2011 - 18:01 | 1253857 penisouraus erecti

hard to argue against all that

Sun, 05/08/2011 - 20:25 | 1254177 BetTheHouse

Agreed. Except the nutty birth certificate comment, of course.

Sun, 05/08/2011 - 20:41 | 1254200 Orly

http://www.youtube.com/watch?v=7s9StxsFllY

Check it out with an open mind, then say how "nutty" it is...

________

But the real question is why would they have such obvious mistakes in the forged document? I mean, a second semester illustrator major could have done a better job faking this document than these guys did.

I am sure CIA has people who could fake my existence but the White House submits this obvious junk for public scrutiny? Why would they do that?

Greeks stay In

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