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Getting A Read on Greece Leaving Euro

by John on 05/19/2012

It’s a guessing game when it comes to Greece.

Let’s look at four different perspectives in the media.  Is this media bias?  No, it’s just a wide range of viewpoints we need to consider.  I have my own conclusions based on this research.  Tell me your thoughts.

The Economist writes that it’s less likely that Greece will exit the euro.   Still, it could happen.  June elections could rebuff austerity and the European bailout plan.  And interestingly, a run on Greek banks, which is happening, could also cause the exit.

But the New York Times piece on Alexis Tsipras, likely to be Greece’s next and very young prime minister seems to hint at a European solution.

In Mr. Tsipras’s view — which neatly dovetails with the rising anti-austerity tide across Europe — Greece’s problem is a European problem that needs a European solution. He insisted that he wants Greece to stay in the euro, just not under the terms of its current bailout. “The euro zone is a chain with 17 links,” he said, referring to its members. “Greece is one of these links. If one of these links breaks, the link is destroyed, but the chain falls apart, too.”

And the Wall Street Journal reports the EU is preparing for Greece to vamoose.

Europe has begun to prepare for Greece’s possible exit from the euro zone ahead of a crucial round of elections in the country next month, which are fast becoming a referendum on its membership in the common currency.

Euro-zone officials have started emergency planning to contain the fallout from a Greek exit from the currency bloc, officials said Friday. That includes the preparation of emergency scenarios by staff at the European Commission, the European Central Bank and in national finance ministries, the officials said.

And a piece from the BBC says Greece can’t leave.

Still, one major issue is that there simply is no mechanism to leave the euro. It was never envisaged by the bright-eyed politicians who created the impetus for the currency, which debuted in 1999. “The treaty doesn’t foresee an exit from the eurozone without exiting the EU,” the European Commission has said.

So it’s not clear at all. 

Here’s my take.  Greece should exit the euro and bring back the drachma.  They can devalue it and start selling cheaper products and services.  Greece will never compete with Germany and the other northern European countries; Greece lacks the resources and skilled workforce. 

This will be painful for everyone in the short run, but probably better in the long run.

However, my bet is this: Greece stays in the euro.

First, the U.S. and President Obama are pushing for more aid to Greece and the other crippled European countries.  It makes sense for his re-election: if Greece defaults then the world economy stumbles badly over the next year.  The Economist article goes into more detail on that.

By far the biggest losers of any Greek exit would be European taxpayers. The Greek central bank owes about €100 billion to the other central banks that are members of the euro. If Greece were to default on that debt Germany alone would probably take a hit of about €30 billion (based on its share of capital in the ECB). The ECB would surely also take losses on the €56 billion of Greek government bonds it (and other central banks) have bought on the secondary market. Euro-zone members and the International Monetary Fund would also be on the hook if Greece repudiated its bail-out loans. Europe’s disbursed bail-out funds total €161 billion, including some collateral temporarily set aside to protect the ECB against losses; the IMF has lent €22 billion.

Here’s the ripple effect for the international banking industry.

The sovereign is not the only debtor in Greece. The Bank for International Settlements reckons that international banks were still owed $69 billion by Greek companies and households at the end of 2011 (see chart 2). Most at risk is France (with a total exposure to households and companies of about $37 billion) followed by banks in Britain (almost $8 billion) and Germany (almost $6 billion).

And then it hits the other euro nations.

The real worry in the event of a Greek exit is that markets focus on other, bigger countries as exit candidates. Portugal and Ireland are next in line. Borrowing costs in Spain and Italy are rising in response to worries over Greece. Shares in Bankia crashed on May 17th in reaction to reports that depositors had pulled €1 billion out of the newly nationalised Spanish lender. Greece’s crisis has dragged on for two years. Policymakers may now have weeks, perhaps less, to ringfence other peripheral countries.

After reviewing that mess, chances are Germany and the rest of the EU see they have little choice but to bailout Greece. 

However, the key is German Chancellor Angela Merkel.  German voters are not keen on more bailouts since it is mostly their money.  She and Germany may bite the bullet and let Greece go.  But I don’t think so.  Still, watch Merkel’s response during this weekend’s G-8 Summit at Camp David.

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