Strategic Briefing: Will Greece Leave the Euro?

European leaders and financial markets braced for Greece exit from euro
The Guardian | May 15
With attempts in Athens to form a government after last week’s election looking increasingly doomed, European leaders abandoned their taboo on talking about the possibility that Greece might have to leave the euro.Shares, oil, and the euro were all sold heavily on Monday in anticipation that anti-austerity parties would garner support in a second Greek election likely to be held next month, bringing the row between Greece and its European creditors to a climax.

Greece Gets Hint of Leeway From Euro Officials
Bloomberg | May 14
European governments hinted at giving Greece extra time to meet budget-cut targets, as long as the financially stricken country’s feuding politicians put together a ruling coalition committed to austerity. Calling talk of a Greek pullout from the euro “nonsense” and “propaganda,” Luxembourg Prime Minister Jean-Claude Juncker said only a “fully functioning” Greek government would be entitled to tinker with the conditions attached to 240 billion euros ($308 billion) of rescue aid.

Fears of Greece EU exit rattle markets
MarketWatch | May 14
“It is generally accepted that the euro zone is better positioned now for a Greek exit than it was a year ago,” said Jane Foley, senior currency strategist at Rabobank International, in a note. “That said, it is widely accepted that any sign that Greece could be preparing to exit the system would still trigger contagion in the more vulnerable euro-zone bond markets.” The greatest uncertainty surrounds how much collateral damage a Greek exit would wreak on other vulnerable—and much larger—sovereigns, particularly given the already-weakened position of Spain, Foley said.

Greek coalition talks drag on as stocks tank on fears over fresh vote
Associated Press | May 14
For the ninth straight day, Greek party leaders were struggling to form a coalition government, riven by differences over the harsh austerity measures demanded by international creditors in return for rescue loans. The impasse means the debt-stricken country is facing the prospect of another national election next month after holding an inconclusive ballot May 6.

Greece and the euro: What’s next?
CNNMoney | May 14
“The threat from Greece remains real, and Greece exiting the euro area would likely have contagion effects that cannot easily be addressed in the current set-up,” said Bank of America Merrill Lynch analysts in a note Monday. “The next weeks are crucial.”

Risk of Greek Euro Exit Rattles Markets, but Hints of More Talks Emerge
The New York Times | May 14
As gridlock among Greece’s political parties made new elections and another month of uncertainty there all but inevitable, European markets dropped significantly on Monday amid concerns that Greece’s departure from the euro was near, and right behind it a new round of financial instability for Europe and the outside world. Yet there were also indications emerging on Monday that the latest turmoil could as easily signify the beginning of a new phase of bargaining between Greece and its European lenders as it could a sudden Greek exit from the euro zone.

If Greece has to leave the euro, it will be because of the reckless decision to bail it out in the first place
Andrew Lilico (The Telegraph) | May 15
The reason Greece is likely to leave the euro is precisely because it was (or, more specifically, those that had lent money to it were) bailed out in 2010. Under the scenario above, official creditors (the IMF, the Germans, etc) would have lent money to Greece only after it had defaulted, much as a classic IMF package involves the IMF lending money to countries after they devalue. But what actually happened was that the official creditors lent money to Greece to try to stop it from defaulting.

A Greek default, a euro collapse?
Gwynne Dyer (The Spec) | May 15
The Greeks will probably be using new drachmas before long. The Spanish may also be back to pesetas and the Italians to liras before we are much older. Perhaps the euro will survive as the common currency of the rich and efficient economies of northern Europe, and perhaps not. But the demise of the euro would not mean the end of the EU or of peace in Europe.

This post originally appeared at The Capital Spectator and is posted with permission.

4 Responses to "Strategic Briefing: Will Greece Leave the Euro?"

  1. halfacanuck   May 15, 2012 at 12:34 pm

    Bob Farrell's rule of investing #9: When all the experts and forecasts agree – something else is going to happen.

  2. rodeneugen   May 15, 2012 at 1:52 pm

    I really don't get it what's so difficult about to understand where Greece and Europe are heading too.
    – Greece GDP is about 300 milliard Euro.
    – Greece debts after write offs are about 400 milliard Euro, mostly external. The interest payments are about 20 milliard Euro 7% of the GDP.
    – Greece annual current account deficit is about 30 milliard Euro or 10% of the GDP. There is no way to finance this deficit unless someone is willing to give a new loan.
    – All what IMF&ECB&Others are ready to do is to change the old loans for new ones, with prolonged expiration date and reduced interest rate.
    The general Greek public is surprised that non of all the write offs and restructuring of loans (write offs), goes to their pockets, but in contrary it increases their economic misery.
    The Greek people said what they want, to stay in the Euro zone, and getting help to finance the 30 milliard current account, (forget about the debts). As reward to Europe for letting them live their previous life, Greece will not destroy the European Union.
    Is the remaining Greece debt too big to fall? It is annoying, but not too big.
    As to Greece, it will have after the new election an extreme left-right government , with no will to make any real decision, except of its plan to receive from Europe annually 30 milliard Euro to cover the current account deficit. If Europe doesn't agree, it will default and stay in the Euro Zone, but without Euros to pay government employed, the pensioners, etc. To overcome the problem, the new left-right government will issue bonds called Eurodrach, with securing delayed Euro payments for four years (the life expectancy of the left+right government). The Euros, will slowly disappear from the markets and be replaced by the Eurodrachs, its rate after wild fluctuations will stabilize on 1 Euro to 3 Eurodrachs. Slowly Greece economy will return to function. Finally after the new elections at 2017, a new central liberal-conservative-socialistic coalition government will be createed, and will try to return to Eurozone, that it never officially left. After negotiating for month the new terms for restructuring its sovereign debt, that officially never defaulted, and a very long weekend, Greece, IMF and ECB will agree to write of the Greece debts to sustainable level of 120% of its GDP, subject to its voluntary withdraw from the Euro zone. By then the Greek GDP will be 150 milliard Euro and its new dept accordingly 180 milliard Euro.

  3. Aegean1972   May 16, 2012 at 6:05 am

    No reasonable person wants Greece to leave the euro and the contagion to start all over and even spread to the US. We re expecting a world meltdown in the next years that could easily last a decade. Why trigger it sooner and harder?

    I think Europe should tell Greece to postpone the elections to September. Until that time, ECB and IMF should make the payments for whatever greek bonds are due, but they shouldnt give Greece the money it needs for salaries, pensions, etc. This way the "suicidal" (and misinformed) Greeks can get a first taste of how things will be like without the euro. Leave them for two months without money. THEN have the elections. we ll see then if they vote for some jack*ss leftist who is nothing more than undeliverable promises. Greece needs to stay within the euro and the euro needs to survive as a currency, because the dollar will become unstable in the future. Unless the western world wants to ditch both $ and euros and start dealing with yuans…which i doubt.