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Will Greece Exit the Eurozone?
Helena Smith of the Guardian reports, Exit from eurozone is Greece's worst option, says Jean-Claude Trichet:
Greece's
exit from the eurozone would be the "worst possible option", Europe's
central bank chief said at the weekend amid concerns over the
debt-stricken country's ability to pull itself out of crisis.
Ahead
of a crucial week for George Papandreou, the prime minister, with
threats of renewed civil unrest over government austerity policies in
the run-up to the leader's keynote annual economic speech, the ECB
president sought to squash speculation that Athens' only solution was to
revert to the drachma.
"We created the euro to achieve the
single market for the prosperity and stability of Europe," Jean-Claude
Trichet said at a meeting of prominent political and business leaders
on the shores of Italy's Lake Como. "The national governments have to
take care of their own national competitiveness within the euro area."
The
Greek administration has won widespread praise for implementing an
unprecedented belt-tightening programme of tax hikes, wage and pension
cuts in return for a three-year, €110bn (£92bn) package of emergency
aid from the IMF and eurozone nations.
Without the rescue loans, the EU member state would have defaulted on its sovereign debt in May.
At
a conference marking his socialist Pasok party's foundation,
Papandreou insisted that Greeks, who are experiencing their first
recession in 16 years, were on course to not only exiting the crisis
but emerging much stronger for it.
But
his government has also been criticised for failing to move fast
enough to enact reforms spurring growth and development, seen as vital
to kick-start the economy. Despite the measures, revenue intake has
also remained off-target.
With borrowing costs for the nation
back at the record levels that preceded the bailout – and public anger
over austerity measures poised, with summer's end, to spill onto the
streets – leading economists are again questioning whether Greece can
weather the storm.
Galloping unemployment has helped fuel fears that the country is heading for an unparalleled winter of discontent.
An
MRB poll revealed that an overwhelming 81.7% of the population
believe the ruling socialists will soon be forced to resort to yet
tougher measures, while nearly 46% think it likely that Greece would
become bankrupt.
Highlighting the
scepticism surrounding Greek efforts to solve the crisis, the head of
Germany's prestigious thinktank IFO Institute, Hans-Werner Sinn,
predicted that further austerity would push the nation to the brink of
"civil war".
The "least bad" option, he said, would be for Athens to drop the common currency.
"The
policy of forced 'internal devaluation,' deflation and depression
could risk driving Greece to the edge of civil war," Sinn told the
gathering of political and business leaders in Italy. "It is impossible
to cut wages by 30% without major riots … Greece would have been
bankrupt without the rescue. All the alternatives are terrible, but the
least terrible is for the country to get out of the eurozone, even if
this kills the Greek banks."
Indeed, Mr. Sinn's dire forecasts have garnered much attention. Ambrose Evans-Pritchard of the Telegraph reports, EU austerity policies risk civil war in Greece, warns top German economist Dr Sinn:
“This tragedy does not have a solution,” said Hans-Werner Sinn, head of the prestigious IFO Institute in Munich.
“The policy of forced 'internal devaluation', deflation, and depression could risk driving Greece to the edge of a civil war. It is impossible to cut wages and prices by 30pc without major riots,” he said, speaking at the elite European House Ambrosetti forum at Lake Como.
“Greece would have been bankrupt without the rescue measures. All the alternatives are terrible but the least terrible is for the country to get out of the eurozone, even if this kills the Greek banks,” he said.
Dr Sinn said Greece is an entirely different case from Spain and Portugal, which still have manageable public debts and can bring their public finances back into line with higher taxes.
“Greece would have defaulted in the period between April 28 and May 7, had the money not been promised by the European Union,” he said, describing the failure of the EU’s bail-out strategy to include a haircut for the banks as an invitation to moral hazard.
“There should be a quasi-insolvency procedure for countries. Creditors have to accept a haircut before any money flows for rescue plans, otherwise we’ll never have debt discipline in the eurozone,” he said.
Greek society has so far held together well, despite a wave of strikes and street violence in the early months of the crisis. However, unemployment is rising fast and political fatigue with such austerity policies typically sets in the second year.
Under the rescue deal, the eurozone pledged €80bn of new loans at 5pc interest and the International Monetary Fund offered a further €30bn.
The joint bail-out was hoped to safeguard Greece against the pressure from global capital markets for two and half years, but the relief rally proved short. Spreads on longer-term Greek government debt have surged back to crisis levels of about 800 basis points, implying a high risk of default.
“We are in the second Greek crisis right now, today,” said Dr Sinn.
Greece is undergoing what amounts to an IMF austerity package but without the IMF cure of debt restructuring or devaluation that usual for a country with a spiralling public debt and a chronic loss of competitiveness.
The IMF says Greece’s debt will rise to 150pc by 2013-2014 even if Athens complies fully, a strategy viewed as self-defeating by several ex-IMF officials. There is a strong suspicion that the real objective is to bail-out North European banks with heavy exposure to Southern Europe, rather help Greece.
Dr Sinn said the Germany is now was super-competitive after clawing back 18pc in competitiveness during its long slump. “We’re in a new phase of history. The toggle switch has turned and we are going to see a mirror image of the last 15 years. This time it is Germany that will have an internal boom,” he said.
Germans will not recyle their savings in the Club Med region. They will invest at home.
Will Greece exit the eurozone and will this wreak havoc on global
financial markets? I strongly doubt it but part of me longs for the good
old drachma years. Things were much simpler back then. Whenever they
ran into economic jams, the government would devalue the drachma.
But the drachma was a joke and so was Greece's competitiveness during those nutty devaluation years. I agree with Prime Minister Papandreou, Greece will emerge stronger after this crisis, but at what social and economic cost? The government needs to focus more on growth and it needs to start thinking outside the box. For example, it can leverage off its ties with Russia to explore oil in the Aegean or better yet, look at developing renewable energy with China who is already a key player in developing Greek shipping ports. Greece needs to create jobs and it needs a long-term plan to diversify away from tourism and shipping.
I am off to visit my sister and family in Greece. My destination is Crete. I will be blogging off and on, but my focus will be less on bond vigilantes and more on family and relaxing in one of the most beautiful places on earth. Below, a little taste of paradise, and if you ever visit, you'll understand why Greece and Greeks will survive any crisis that comes their way.
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Central bankers are so transparent. Greece leaving the EU is the "worst possible option?" Well, if you are a barely solvent bank holding Greek debt, I agree. Even holding those bonds to maturity will mean nothing if you have to translate them into drachmas and take a 50% hit. What are we talking, EUR 100B-200B in losses? I don't know how much Greek sovereign debt is currently being held outside of Greece.
hi leo, thanks for your article. this is a little off topic but thought maybe you would be interested. don't know how to draw a conclusion. what do you think about this?
China Allows Insurers to Invest In Private Equity, Real Estate TPG Venture to Create Chinese Currency Funds Burger King Agrees to $4 Billion Takeover OfferThe fast-food giant was last taken private in 2002 by three buyout firms — TPG Capital, Bain Capital and Goldman Sachs’s private equity unit — but it returned to the public
rumor has it there will be a coup sep20 onwards... coup bitchez
I wonder if Spain & Portugal are still safe when they each default on one another's debts and Grease screws them both?
Those frankfurt waitresses better start working double shifts to support the managerie of grifters in the piigs.
Sorry Tyler, but the most important stories in Europe are now The Netherlands and Belgium where this weekend both their governments have yet again failed to get a deal around their financing laws.
Belgium is about to break up, and the Netherlands might yet again do a re election.
The most important stories are about political stability that is breaking down in Euroland. Nobody cares about greece.
And if these countries break up, the damage to their bonds will be awsome!
Can anyone confidently explain why Greece is not allowed take its natural course and default? If anyonen can convincingly articulate it ... then please explain the same for Bear Stearns, AIG, etc...
Last of the PIIGS to default is a rotten egg. I can't see the Greeks putting up with the austerity program when they know their debt is so big they will never pay it off. That's why capitalism has bankruptcy. Start over from scratch. Greece's creditors should have known better. Let them take the hit, not the people of Europe. The Greeks feel shafted. That feeling will only grow until they regain a sense of independence. That's my take from very far away and I could be completely out to lunch.
greece will not leave eurozone.
why bother when you have all 17 nations pledging 1 trillion to support you
Greece is fannie and freddie of europe
there are no solutions there
Just killing time and someone else's money
I would like to marry Ben Bernanke's daughter if he has one
I will have a special window of access to fed for ever- Maddy liquid forever Fund[MLFF]
Problem solved!!!!!!!!!!
[PS: A friend told me ZH is on top list of sites monitored by feds
So hi there,The bernanke wedding idea was not mine, a fed sponsored INCEPTION????
Please don't waste time monitoring my phone calls I'm a useless mass of protoplasm
And this information is not valid for my future employers]
sarcasm off/
If they're not kicked out, I expect successive "German" governments to fall. I think it is a race between Germany and France to pull the plug, and see the first to do so gaining a head start on the rest. European political and economic structures are insane at the moment. Even worse than here.
At first it made no sense for Greece to "leave." That's because "the free money express" was coming to town. What the Greeks are finding out is the same thing the "Bankers on Wall Street" have discovered: government gives nothing for free least of all "money from printing presses." "Leaving the euro" isn't an option for Greece. The eurolanders are kicking them out, they're just waiting for the Greeks to "discover" this. In short "the bailout was for the all important French and German banks." And needless to say "the gypsies are no longer welcome in the promise land." Of course ex-communicating Wall Street from Washington yields it own set of problems since "neither are vying for sainthood."
i just watched those videos ...... i'm going there. thank you to whoever posted those videos, they were wonderful & i really needed to be swept away by something so beautiful. sincerely ......
I will show up when I can buy half the place by just paying the property taxes.
The option of leaving the eurozone never made sense to me from Greece's standpoint. Forgetting for a minute about the logistical difficulties, the very first thing that would happen is that it would be a free-for-all shooting against the drachma. You'd see a situation like, the currency getting cut 10 and 20% a day.
How does it help their situation when their currency is getting killed and their debt is euro-denominated? That's the classic formula the west has used to screw third-world countries for decades now.
If they left, they wouldn't be able to access credit markets for less than double-digits. Right now, we have the comical situation where Ireland has to borrow at 7% to pay its share of contributions to the EU so Greece can borrow at 5%.
The German and French banks certainly have a vested interest in the current status quo. The way this crisis has gone, despite having months to clean their sheets, you just *know* they're so stupid they're still loaded to the gills with Greek debt.
In short, I hear this meme about 'leaving the eurozone,' but I never see a single plausible argument why they would be motivated to do so, or why it would work. To me, it's tantamount to saying that Illinois will secede from the US and issue Lincoln Logs as currency because it owes too many US dollars. The instant they do that, their muni debt falls through the floor and Lincoln Logs get revalued at something like 1% of their initial exchange rate.
Can someone much brighter explain it all to me?
Greece is a nation of Greeks. Germany a nation of Germans. They only share a currency, not identity.
Illinois spawned Obama, and they really love Islamic fascism, but they are American.
You are assuming Grease leaves and keeps the debt or what? If Grease repudiates their debt, in time they will have access to credit market again, but in the interim will they really need gto borrow? Argentina was not blackballed.
Plenty of insane pension funds will buy Greek Bonds because of the amazingly huge promised returns. Said funds need promised returns that are at least double the going rate in order to meet their projections.
Will it all end in tears? Of course, but not for the people who only manage the pension funds, since they don't have to live off from those funds themselves. And anybody stupid enough to trust professionals to perform their fiduciary duties is just begging to be robbed anyway.
Zack, I doubt I'm brighter, let alone much brighter but here's my take.
Greece is now sliding into a depression (deflationary or inflationary doesn't really matter). At the end of the troika bailout package, Greece's Debt/GDP ratio will be at 150% versus the 120% today. The country is in a nose dive towards disaster and serious civil unrest is one strike away.
Greece never got bailed out, what got bailed out where German and French banks at the expense of the Greek middle class (and in a lot of ways the underprivileged stata of their society). This bailout solution is draining whatever blood is left in the Greek economy and it will end in a complete crash/disaster. Papandreou knows that, so does Trichet, Merkel and Sarkosy.
There are no easy solutions. Continue this downward spiral they are on now, or default which has it's own issues (currency devaluation, pensions wiped out, huge inflation). But at least with the default solution, they can get to the bottom quickly and then start to rebuild. Their tourism industry and agro products would really kick some serious ass, as well as become a preferred outsourcing destination for central EU corporations. After all Greece will have a modern communications system, decent infrastructure and a highly educated workforce at the right price all of a sudden.
As far as I'm concerned, default is inevitable, it's just that the troika is trying to manage the situation so that the entire misguided euro project doesn't blow up with it.
Yes, in matters of international finance, all schemes fail in the end. It will be much cheaper for Greece to default immediately rather than going through an agonizing depressionary process and then default anyway. When Greece becomes a cheap vacation destination, I too will join Leo in a sunny Greek vacation!
What did we get for helping out with the first Greek Crisis?
'We' got the amazing benefit of not having our TBTF banks who hold hundreds of billions in Greek debt from being stiffed when the paper became worthless. This means that 'we' can keep visiting our money at B of A, Chase etc., knowing that they won't be changing the name on the front of the bank for a few more months.
Now that kind of security has to be worth a lot, right?
You got nothing. And you liked it.
If GREECE leaves the EUROZONE & defaults on their debt, then I PLEDGE to travel to GREECE, have a great vacation & spend some of my worthless U.S. dollar bills there.