Archive for May, 2012

Greece To Leave the Euro

May 18, 2012

Is it just me, or does everyone think that accepting Greece into the Euro was one of the most stupid decisions made during the 20 century?

I can imagine the conversation between the Greek government and the ECB…..

“So are you certain that these Greek debt numbers are right?”

“Oh yes, of course… why would we lie to you?”

“That’s fine then, welcome aboard”

There is of course a good argument that Greece would be economically screwed were it a Euro member or not. Any country that doesn’t collect income tax from its people is going to be fucked either way, so from the Greek view point membership provided a safety net and vital access to the ECB’s cash reserves.

The Germans are so determined to make their fiscal experiment work, as well as benefiting from the current economic differences between member states, that bailing out a failing country with ever increasing debt was always on the cards. The popular term is “kicking the can down the road” which perfectly describes the ECB’s action so far. Rather than address the fundamental problems of countries that have been spending more than they earn and now can’t afford to repay it, they have instead just lent them more money…. as long as they made noises along the lines of promising to try to spend less in future.

The big problem with financial austerity is that the politicians and finance experts know what needs to be done, but as they are elected by people who like having stuff…. mostly for nothing, getting elected to actually carry out some austerity is proving difficult.

Even in the UK, for all the talk of austerity, we will be borrowing more during the first 5 years of the coalition government than Gordon Brown and Tony Blair ripped through in 13 years. What is bizarre, is that we seem to be making massive cuts to services, but not actually saving any money, reducing spending, borrowing or our debts.

If this is austerity, and financial prudence, I would hate to see frivolous spending!

So what’s going to happen when Greece leave, or are thrown out of the Euro?

It looks to me like this is going to happen sooner rather than later, and there are two main possible outcomes.

The first is that an orderly exit is planned for Greece to return to the Drachma, paving the way for instant devaluation which should make them more competitive against the Euro. Good news for cheap holidays possibly, and Taramasalata sales, but due to the lack on competitive industry in Greece, unlikely to solve its problems in the longer term. The upside for the Euro is that confidence would be instantly raised as it would then become less likely that Italy, Spain, Portugal and Ireland would end up leaving.

The second option is for a forced exit, if Greece were to default on its latest debt repayments, then a rapid exit would be forced upon it. Ironically, Greece would still receive European funding in order to dig itself out of the mess it is in even outside of the Euro mechanism.

Markets are expecting to see Greece leave, and a strong rebound is then expected, especially in banking stocks.

Whether Greece’s departure will prevent a run on the banking systems of the southern states is not clear, as the markets have a habit of picking at the carcass until the meat is gone, so it is by no means guaranteed that Greece leaving the Euro will secure the Euro’s survival. It is expected that the Spanish banking system will be thoroughly tried and tested in the coming months as the markets dictate who stands and falls in this crisis.

Spanish bonds are already trading at unsustainable levels, meaning that raising more money is going to be near impossible for them, well…… if they are to stand any hope of ever paying it back that is.

Where is it going to end and what does it mean for us…… well, it means, that we did well not to get tied up in a halfhearted fiscal pact of monetary union that had no control of each states borrowing levels. It also means that due to the fact that the UK Banking sector provides much of the funding across the Euro zone that our banks are liable for billions in defaults, and we all know where they like to come to to restore their balance sheets when their gambles fail to pay off.

So, to summarize, whatever happens, the outcome is looking a bit bleak…… this experiment of taking a collection of tourist destinations, giving them the same currency and hoping it pans out looks to have failed…… there is an old saying, “you can’t polish a turd”….. it turns out to be based on fact.

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