was considered unthinkable a few months ago has now become probable.
All over the globe there are headlines proclaiming that a Greek exit from the
euro is now a real possibility. In fact, some of those headlines make it
sound like it is practically inevitable. For example, Der
Spiegel ran a front page story the other day with the following startling
headline: "Acropolis, Adieu! Why
As I have written about previously, New York Times economist Paul Krugman is wrong about a whole lot of things, but in a blog post the other day he absolutely nailed what is likely to soon unfold in Greece....
1. Greek euro exit, very possibly next month.
Huge withdrawals from Spanish and Italian banks, as depositors try to move
their money to
3a. Maybe, just possibly, de facto controls, with banks forbidden to transfer deposits out of country and limits on cash withdrawals.
3b. Alternatively, or maybe in tandem, huge draws on ECB credit to keep the banks from collapsing.
4b. End of the euro.
If one country is allowed to leave the euro, that means that other countries will be allowed to leave the euro as well. This is the kind of uncertainty that drives financial markets crazy.
When the euro was initially created, monetary union was intended to be irreversible. There are no provisions for what happens if a member nation wants to leave the euro. It simply was not even conceived of at the time.
So we are really moving into uncharted territory. A recent Bloomberg article attempted to set forth some of the things that might happen if a Greek exit from the euro becomes a reality....
Greek departure from the euro could trigger a default-inducing surge in bond
yields, capital flight that might spread to other indebted states and a
resultant series of bank runs. Although
In fact, yields on Spanish debt and
Italian debt are already rising rapidly thanks to the bad news out of
What makes things worse is that a new
government has still not formed in
Meanwhile, the Greek government is
rapidly running out of money. The following is from a Bank of
"If no government is in place before June when the next installment (of loan money) from the European Union and International Monetary Fund is due, we estimate that Greece will run out of money sometime between the end of June and beginning of July, at which point a return to the drachma would seem inevitable"
In the recent Greek elections, parties that opposed the bailout agreements picked up huge gains. And opinion polls suggest that they will make even larger gains if another round of elections is held.
The Coalition of the Radical Left, also known as Syriza, surprised everyone by coming in second in the recent elections. Current polling shows that Syriza is likely to come in first if new elections are held.
The leader of Syriza,
Alexis Tsipras, is passionately against the bailout
agreements. He says that
A spokesman for Syriza, Yiannis Bournos, recently told the Telegraph the following....
"Mr Schaeuble [
Who will blink first?
Will either of them blink first?
Syriza is trying to convince the Greek people
that they can reject austerity and
stay in the euro. Syriza insists that the rest
And most Greeks do actually want to
stay in the euro. One recent poll found that 78.1 percent of all Greeks want
But a majority of Greeks also do not want anymore austerity.
Unfortunately, it is not realistic
for them to assume that they can have their cake and eat it too. If
Outgoing deputy prime minister of
"We will be in wild bankruptcy, out-of-control bankruptcy. The state will not be able to pay salaries and pensions. This is not recognised by the citizens. We have got until June before we run out of money."
In fact, there are rumblings that the European financial system is already making preparations for all this. For example, a recent Reuters article had the following shock headline: "Banks prepare for the return of the drachma"
But a new drachma would almost certainly crash in value almost immediately as a recent article in the Telegraph described....
Most economists think that a new, free-floating drachma would immediately crash by up to 50 percent against the euro and other currencies, effectively halving the value of everyone's savings and spelling catastrophe for those on fixed incomes, like pensioners.
A Greek economy that is already experiencing a depression
would get even worse. The Greek economy has contracted by 8.5 percent over the past 12 months and
the unemployment rate in
But the consequences for the rest of
Unfortunately, at this point it is hard to imagine a scenario in which the eventual break up of the euro can be avoided.
Germany would have to become willing to bail out the rest of the eurozone indefinitely, and that simply is not going to happen.
So there is a lot of pessimism in the financial world right now. Nobody is quite sure what is going to happen next and the number of short positions is steadily rising as a recent CNN article detailed....
After staying quiet at the start of the year, the bears have come roaring back with a vengeance.
interest -- a bet on stocks turning lower -- topped 13 billion shares on the
If the eurozone
is going to survive,
Instead of removing the weakest link from the chain, the reality is that a Greek exit from the euro would end up shattering the chain.
Confidence is a funny thing. It can take decades to build but it can be lost in a single moment.
A common currency in
As the eurozone
crumbles, it is likely that
So what do you think?
Do you think that I am right or do you think that I am wrong?
Please feel free to post a comment with your thoughts below....