Greece on the way out of the euro

[bigbadwolf]

Looks like Greece is on its way out of the euro:

http://finance.yahoo.com/news/Germany-Readies-Surrender-bloomberg-2533229394.html?x=0

 

[koupparis]

Seems like Greece said they plan on staying in the Euro and Merkel's party said the same. The only person hinting at Greece leaving the Euro was Canada's finance minister. Default is imminent, leaving the Euro is not.

 

[TraderJoe]

Default is a near certainty. They need $300 Billion in immediate bailout to service their pension and healthcare obligations. With an economy contracting at 8% per year and an incredibly elderly population, they are done. No way out. Germany refuses to bail them out. I hope policy makers in USA learn their lessons and rein in their debt instead of funding Social Security and Medicare with $2 trillion per year of additional debt.

 

[bigbadwolf]

Seems like Greece said they plan on staying in the Euro and Merkel's party said the same. The only person hinting at Greece leaving the Euro was Canada's finance minister. Default is imminent, leaving the Euro is not.

If they default on their euro debt, who's going to finance their euro deficits if they stay in the Eurozone? (Note: I'm not saying they'll leave the EU -- just the euro currency).

 

[DominiConnor]

I've no problem at all imagining a Greek default, the question is whether that means it has to leave the Euro...
Although Greece is a guarantor of the currency, it's a tiny % of the Euro land economy, so I do not see any reason why it must be kicked out and I don't believe it will choose to leave this side of an election.

Part of me sees Greece not as real sovereign debt but more like a corporate in a given currency zone, a default in $ doesn't mean you're not in the USA any more.

My feeling is that we wil see a "technical default", ie bond holders being obliged to lengthen the maturity of their holdings.

That forms part a "least bad" situation, the regulators could choose to treat the default as not affecting the underlying value of the holdings keeping them solvent.

Also, that would cause the value of Greek and other troubled Euro states debt to increase, that should happen because once the market knows the boundary of badness people will start bargain hunting.
I believe someone is going to make Soros level money on buying the pathetically cheap Greek 2 year bonds which will become (perehaps) 5 year bonds. Nice gain from both the price going up and the established ooupon.

...or they will be utterly destroyed by this gamble, you choose.

 

[bigbadwolf]

Default is a near certainty. They need $300 Billion in immediate bailout to service their pension and healthcare obligations. With an economy contracting at 8% per year and an incredibly elderly population, they are done. No way out. Germany refuses to bail them out. I hope policy makers in USA learn their lessons and rein in their debt instead of funding Social Security and Medicare with $2 trillion per year of additional debt.

At the risk of digressing, the problem with Social Security is that its coffers have been raided over the years and left with nothing but IOUs. The government has created an artificial SS "crisis" because it doesn't want to honor present SS obligations by redeeming some of those IOUs by diverting revenue there (they'd rather spend it on wars in the Middle East). Had the coffers not been raided, SS would have been self-financing till about 2035.

 

[koupparis]

How different would financing euro debt be versus financing drachma debt? I'm not clear on this, but wouldn't the same people who would finance them in drachmas finance them in euros?

Also I feel that leaving the euro would cause a bigger panic and possibly more defaults. There would be bank runs in Greece, which would spread to Ireland, Spain etc. I don't know if anyone is willing to risk this.

 

[bigbadwolf]

How different would financing euro debt be versus financing drachma debt? I'm not clear on this, but wouldn't the same people who would finance them in drachmas finance them in euros?

After default, Greece will probably find it difficult to sell even drachma bonds. But eventually they can go back to the pre-euro status quo: running deficits, periodically devaluing the drachma (or more likely allowing the market to do it), and offering premium rates of interest to make up for it. On the other hand, if they stay in the euro, their deficits will continue, without any possibility of devaluing, since they don't control the currency. I just can't find it conceivable that they can stay in the euro after default, as no-one will want to lend to them and their deficits will persist

Also I feel that leaving the euro would cause a bigger panic and possibly more defaults. There would be bank runs in Greece, which would spread to Ireland, Spain etc. I don't know if anyone is willing to risk this.

And the alternative? The German electorate, and generally North European electorates, will not allow tighter union, nor will they be satisfied with blank-cheque guarantees of Club Med sovereign debt. Probably Euroland is going to be reconfigured. The status quo of the last decade is dead. The politicians would rather do nothing (which is what they've mostly been doing till now), but the pressure of circumstances is leading to a radical reconfiguration in which Club Med will be out and the Nordic economies will be more tightly wed to one another (I'm guessing).

 

[myampol]

How different would financing euro debt be versus financing drachma debt? I'm not clear on this, but wouldn't the same people who would finance them in drachmas finance them in euros?

Hugely different: Greece could devalue the Drachma, but they can't devalue the Euro.

By devaluing , it would become less expensive for them to repay Drachma-denominated debt (because they would be paying in a currency that has suddenly become cheaper.)

But, if you are a foreign (non-Drachma based) investor, such devaluation screws you... a large chunk of the notional value of your bonds, as translated into your base currency, just vanished.

They could do this to you ONCE -- but, going forward, you (and the rest of the market) would be much less likely to purchase Drachma-denominated debt, fearing that they might do it again.

By joining the Euro, they've forfeited their opportunity to play the above game, as devaluation is no longer an option.

 

[Abdel]

Yet, another country bankrupt because of social programs that are immoral and economicly not viable (ponzi schemes).

 

[Joy Pathak]

calm down perry

 

[Anthony DeAngelis]

I think Greece defaulting is only half the problem. Even if they extend the maturity of the loans and maybe take some losses, Greece will still need severe austerity. This is cause massive unrest and will only lead to cries of succession. Let's face it, the EU and Euro have grown too far and too fast. Kicking them out doesn't mean the Euro is a failure, on the contrary, it means there are standards that must be met. Keeping them in and transferring money from strong nations to weak ones, only to fund their luscious pensions and easy lifestyle is a tough pill to swallow.