Greece considers leaving Eurozone

[J]

Spiegal online link

Athens Mulls Plans for New Currency
Greece Considers Exit from Euro Zone
By Christian Reiermann

The debt crisis in Greece has taken on a dramatic new twist. Sources with information about the government's actions have informed SPIEGEL ONLINE that Athens is considering withdrawing from the euro zone. The common currency area's finance ministers and representatives of the European Commission are holding a secret crisis meeting in Luxembourg on Friday night.

Greece's economic problems are massive, with protests against the government being held almost daily. Now Prime Minister George Papandreou apparently feels he has no other option: SPIEGEL ONLINE has obtained information from German government sources knowledgeable of the situation in Athens indicating that Papandreou's government is considering abandoning the euro and reintroducing its own currency.

Alarmed by Athens' intentions, the European Commission has called a crisis meeting in Luxembourg on Friday night. The meeting is taking place at Château de Senningen, a site used by the Luxembourg government for official meetings. In addition to Greece's possible exit from the currency union, a speedy restructuring of the country's debt also features on the agenda. One year after the Greek crisis broke out, the development represents a potentially existential turning point for the European monetary union -- regardless which variant is ultimately decided upon for dealing with Greece's massive troubles.

Given the tense situation, the meeting in Luxembourg has been declared highly confidential, with only the euro-zone finance ministers and senior staff members permitted to attend. Finance Minister Wolfgang Schäuble of Chancellor Angela Merkel's conservative Christian Democratic Union (CDU) and Jörg Asmussen, an influential state secretary in the Finance Ministry, are attending on Germany's behalf.

'Considerable Devaluation'

Sources told SPIEGEL ONLINE that Schäuble intends to seek to prevent Greece from leaving the euro zone if at all possible. He will take with him to the meeting in Luxembourg an internal paper prepared by the experts at his ministry warning of the possible dire consequences if Athens were to drop the euro.

"It would lead to a considerable devaluation of the new (Greek) domestic currency against the euro," the paper states. According to German Finance Ministry estimates, the currency could lose as much as 50 percent of its value, leading to a drastic increase in Greek national debt. Schäuble's staff have calculated that Greece's national deficit would rise to 200 percent of gross domestic product after such a devaluation. "A debt restructuring would be inevitable," his experts warn in the paper. In other words: Greece would go bankrupt.

It remains unclear whether it would even be legally possible for Greece to depart from the euro zone. Legal experts believe it would also be necessary for the country to split from the European Union entirely in order to abandon the common currency. At the same time, it is questionable whether other members of the currency union would actually refuse to accept a unilateral exit from the euro zone by the government in Athens.

What is certain, according to the assessment of the German Finance Ministry, is that the measure would have a disastrous impact on the European economy.

"The currency conversion would lead to capital flight," they write. And Greece might see itself as forced to implement controls on the transfer of capital to stop the flight of funds out of the country. "This could not be reconciled with the fundamental freedoms instilled in the European internal market," the paper states. In addition, the country would also be cut off from capital markets for years to come.

In addition, the withdrawal of a country from the common currency union would "seriously damage faith in the functioning of the euro zone," the document continues. International investors would be forced to consider the possibility that further euro-zone members could withdraw in the future. "That would lead to contagion in the euro zone," the paper continues.

Banks at Risk

Moreover, should Athens turn its back on the common currency zone, it would have serious implications for the already wobbly banking sector, particularly in Greece itself. The change in currency "would consume the entire capital base of the banking system and the country's banks would be abruptly insolvent." Banks outside of Greece would suffer as well. "Credit institutions in Germany and elsewhere would be confronted with considerable losses on their outstanding debts," the paper reads.

The European Central Bank (ECB) would also feel the effects. The Frankfurt-based institution would be forced to "write down a significant portion of its claims as irrecoverable." In addition to its exposure to the banks, the ECB also owns large amounts of Greek state bonds, which it has purchased in recent months. Officials at the Finance Ministry estimate the total to be worth at least €40 billion ($58 billion) "Given its 27 percent share of ECB capital, Germany would bear the majority of the losses," the paper reads.

In short, a Greek withdrawal from the euro zone and an ensuing national default would be expensive for euro-zone countries and their taxpayers. Together with the International Monetary Fund, the EU member states have already pledged €110 billion ($159.5 billion) in aid to Athens -- half of which has already been paid out.

"Should the country become insolvent," the paper reads, "euro-zone countries would have to renounce a portion of their claims."

According to a news report I just heard on CBC radio here in Canada, the Greek finance minister has officially denied any talks of leaving the Euro. If my trusty "it's not official until it's officially denied" indicator is correct we should see a formal default by the end of the year.

[Patrick Degan]

On and off, I've wondered if the world financial crisis would wind up torpedoing the European Union.

[Broomstick]

OK, could someone explain this to me:

At the same time, it is questionable whether other members of the currency union would actually refuse to accept a unilateral exit from the euro zone by the government in Athens.

If Greece decides to leave - what will these objectors be able to do about it, realistically? Start a war? Line up along the border and blow raspberries? What?

[Zed]

Both Greece and the Eurozone deny: http://www.expatica.com/de/news/local_n ... 47283.html

[D.Turtle]

OK, could someone explain this to me:

At the same time, it is questionable whether other members of the currency union would actually refuse to accept a unilateral exit from the euro zone by the government in Athens.

If Greece decides to leave - what will these objectors be able to do about it, realistically? Start a war? Line up along the border and blow raspberries? What?

well, they would be breaking some quite strong contractual obligations. It would have severe effects on the credibility and standing of Greece in the European Union (moreso than they've already suffered). In addition, pretty much all their debt is in Euros, and they've gotten quite a lot of money - and promises for even more - from other countries.

A default would be completely unavoidable.

[Johonebesus]

Weren't these sorts of problems pretty much guaranteed from including nations with such disparate economies?

[Sea Skimmer]

Weren't these sorts of problems pretty much guaranteed from including nations with such disparate economies?

Yup; and the Eurozone originally had debt limiting rules which should have prevented such heavily indebted nations from joining in the first place. But someone made the decision that simply ‘showing progress’ towards the debt limits was good enough. The rules effectively went out the window not just for Greece but some of the larger powers like France also ignored them.

[K. A. Pital]

There wouldn't be a problem if European nations stuck to the debt limiting rules. However, taking on private sector debts to "save the economy" was so tasty they couldn't skip on it, swallowing the bailout mania and getting a sour aftertaste.

[J]

If Greece decides to leave - what will these objectors be able to do about it, realistically? Start a war? Line up along the border and blow raspberries? What?

Demand collateral for loans and make them into debt slaves. Greece wants to default or leave? Fine, we own them anyway!

Bloomberg link

EU Said to Consider Requiring Collateral for Extra Greek Aid
By James G. Neuger and Brian Parkin - May 8, 2011 9:43 AM ET

European Union officials may require Greece to provide collateral for aid as policy makers struggle to prevent the euro area’s first sovereign debt restructuring, said a person with direct knowledge of the situation.

Expanding the 110 billion-euro ($158 billion) lifeline Greece received last year may mean that assets or revenue from asset sales are used to secure extra funds, the person said. Demanding collateral, an idea floated last year by Finland, may help avoid a political backlash against bailouts.

European Union finance officials, who held an unannounced meeting May 6 in Luxembourg, are preparing the help to ease a debt burden that some investors say will lead to a restructuring. Other steps may include lower interest rates or longer maturities on bailout loans, said Norbert Barthle, budget spokesman for German Chancellor Angela Merkel’s ruling party.

“We’ll just have to bite the bullet,” Barthle said in an interview yesterday from his district in the state of Baden- Wuerttemberg. “We need to help Greece help itself. What’s the alternative? We don’t want to be pushed over the edge into restructuring.”

Greek bonds have tumbled since mid-April when German officials indicated they wouldn’t oppose a restructuring. Greece denied a report in Germany’s Spiegel magazine May 6 that said it threatened to withdraw from the euro.
‘Further Adjustment’

“We think that Greece does need a further adjustment program,” Luxembourg Prime Minister Jean-Claude Juncker, who chairs the group of euro-area finance ministers, said after the May 6 gathering. “We’re not discussing the exit of Greece from the euro area. This is a stupid idea -- no way.”

Greece has already received an extension on bailout loans this year and policy makers in Athens say another lengthening would help avoid a broader restructuring.

Increasing aid may run into opposition in Germany and Finland, where bailouts have sparked a backlash. Finnish Finance Minister Jyrki Katainen, who suggested seeking collateral for Ireland for its November bailout, is leading talks to form a government that may include the euro-skeptic True Finns party.

The True Finns oppose the bailout for Portugal and see a Greek default as inevitable.

“It’s a question of time before a default will happen,” Party leader Timo Soini told Bloomberg Television May 5. “The bailout doesn’t work; we have seen that in Greece.”
Speculation Dismissed

European finance chiefs and the Greek government dismiss restructuring as a possibility. “We were excluding the restructuring option which is discussed heavily in certain quarters of the financial markets,” Juncker said.

The euro slid after the Spiegel report, declining 1.5 percent in New York trading May 6 to $1.4316. U.S. stocks pared gains and Treasuries rose as reports of the meeting stoked speculation that a restructuring may be in the works.

Greek Prime Minister George Papandreou said the report of a possible euro exit was made up and the government was handling the country’s debt in the best way possible, Kathimerini newspaper reported.

Abandoning the euro would have “catastrophic” consequences, Greek Finance Minister George Papaconstantinou told Italian newspaper La Stampa. Public debt would double, consumer spending power would be “shattered” and the country would sink into a “war-like recession,” he said.

Speaking to reporters in Athens yesterday, Papaconstantinou said the government is determined to implement the bailout plan to overhaul the economy. “Markets are still jittery and we will do all that’s necessary to calm them.”
EU Agenda

Finance chiefs from France, Germany, Italy and Spain and European Union Economic and Monetary Affairs Commissioner Olli Rehn also attended the May 6 session in Luxembourg.

Beyond Greece, the agenda included the Portugal bailout, a successor to European Central Bank President Jean-Claude Trichet, whose term ends in October, and details of the crisis- fighting program to take effect in 2013, a separate European official said.

Papaconstantinou attended and briefed on the state of the Greek economy, the Athens-based Finance Ministry said in a statement, adding there was no discussion of Greece’s status as a member of the euro area.

The meeting came a year after the EU put together an unprecedented 750 billion-euro backstop on a Sunday night in Brussels to end the debt contagion that began in Greece. It hasn’t worked so far. Ireland and Portugal have since been bailed out and Greece has been forced to fend off suggestions that it was headed to default.
Restructuring More Likely

The Wall Street Journal, citing an unidentified senior euro-zone government official, reported yesterday that Greece has asked its euro-zone partners to ease the country’s deficit targets. Separately Kathimerini said the Greek government requested at the May 6 meeting an extension of the bailout program by two to four years, without saying how it got the information.

People with knowledge of the discussions said yesterday there was no discussion about extending or changing the original bailout agreement at the meeting.

“The likelihood of a restructuring of Greek market debt this year has gone up,” David Mackie, London-based chief European economist at JPMorgan Chase & Co., said in a note May 6.

Greece has about 330 billion euros in outstanding bonds, according to a May 5 report by UBS AG. The Swiss bank estimates that 22 percent is held by Greeks and Cypriots, the ECB has 19 percent and the EU and International Monetary Fund together have about 11 percent.
Greek Bonds

About 22 billion euros will mature this year and 33 billion euros next year, according to an April 29 ING Groep NV report.

Greek bonds have declined since the 2010 bailout, with yields on two-year notes reaching a euro-era record of 26.27 percent on April 28. The extra yield investors demand to hold Greek 10-year debt over comparable German bonds widened 4 basis points to 1,233. Greece was supposed to return to markets next year even as its debt peaks at 159 percent of gross domestic product.

U.K. Chancellor of the Exchequer George Osborne said EU finance ministers may recommend additional euro-region funding for Greece.

A Greek default is not inevitable, and there have been no suggestions in private or public that the country might abandon the euro, Osborne said.

“It’s inevitable we’re going to look at the Greek package and see what they can do to get through next year,” Osborne told BBC TV’s Andrew Marr Show today. “That might involve additional assistance from, for example, the euro zone,” he said.

[Axiomatic]

I'm a terrible economist.

Please explain to me why the EU would WANT to retain Greece. What, exactly is the downside to Greece leaving, aside from the blow to prestige that comes from anyone wanting to leave at all? What is the economic downside to not being obligated to support Greece?

[Qwerty 42]

I'm a terrible economist.

Please explain to me why the EU would WANT to retain Greece. What, exactly is the downside to Greece leaving, aside from the blow to prestige that comes from anyone wanting to leave at all? What is the economic downside to not being obligated to support Greece?

It's essentially the sunk cost fallacy in action. If Greece leaves, as the article mentions, that leaves the countries like Germany that footed the bailout holding the tab. While you could argue, probably rightly, that retaining Greece will ultimately cost more than cutting losses at this point, that'd be very hard to explain to the taxpayers.

It would also be a symbolic defeat to the Euro as a whole, I would imagine. The countries really committed to the currency want to appear strong, as you pointed out.

[Skgoa]

Also, it might further destabilize the other Euro economies. And lets not forget that Germany benefots greatly from the common market.

[Fingolfin_Noldor]

I think the really big sticking point would be the sheer quantity of Greek debt German, French etc. banks hold.

[Skgoa]

But that wouldn't go away, would it?

[Broomstick]

There's going away over time, bit by bit, and then there's the bill coming due all at once. Debt is much less painful to pay off in installments, over time.

[Sea Skimmer]

And the fact that sovereign default might not stop with Greece. That’s what they are really afraid of happening if Greece goes under. Greece alone could be written off.

[Thanas]

I find it curious that this OP was not modified considering that Greece is denying it and nearly everybody else as well.

[J]

Please explain to me why the EU would WANT to retain Greece. What, exactly is the downside to Greece leaving, aside from the blow to prestige that comes from anyone wanting to leave at all? What is the economic downside to not being obligated to support Greece?

First off, many European banks hold many billions worth of Greek bonds on their balance sheets. If Greece leaves the Eurozone and restructures or defaults on its debts then those bonds are severely devalued or become worthless altogether, this leaves a giant hole in the balance sheets of various European banks and some of them will be rendered insolvent. Next, there's a ton of derivatives such as interest rate swaps and credit default swaps which based on Greek bonds, these derivatives are held and traded by many of European banks as well as those in other parts of the world. In the event of a default or restructuring of Greek debts, those derivatives are triggered and a whole bunch of parties will need to pay up on their bets, the problem here is what's called counterparty failure; the entity which needs to pay up can't do so because it doesn't have the money on hand, so that's another insolvent bank or financial.

The short version is it's very easy for a domino effect to get started in the banks & other financials and rather difficult to keep it contained if it's not caught in time. The Europeans do not want to risk a wave of bank failures & the resulting economic panic so they bailout Greece so that it can continue paying its debts and that maintains the value of Greek bonds being held by European banks and keeps them solvent. In other words, they use Greece as a backdoor bailout & insurance policy for their own banks.

I find it curious that this OP was not modified considering that Greece is denying it and nearly everybody else as well.

Sure, and last year they all denied needing a bailout in the first place. Then they denied needing further bailouts. Both happened anyway. Same with Ireland, same with Portugal. Somehow, I don't place much trust in their denials. Boy who cried wolf sound familiar?

[Thanas]

Sure, and last year they all denied needing a bailout in the first place. Then they denied needing further bailouts. Both happened anyway. Same with Ireland, same with Portugal. Somehow, I don't place much trust in their denials. Boy who cried wolf sound familiar?

You might have a point if Greece leaving the Eurozone would make sense. Why do you think it does, considering it will wreck the greek economy?

[Broomstick]

In other words, Greek debt is another thing that has grown too big to be allowed to fail. This is the downside of everything being so interconnected, failure as well as success can be shared.

I really hope the whole house of cards doesn't come crashing down at some point.

Meanwhile, I'm off to enjoy the day, since I refuse to let the coming potential apocalypse ruin my present. Not like there's a damn thing I can do about it anyway.

[K. A. Pital]

Sure, and last year they all denied needing a bailout in the first place. Then they denied needing further bailouts. Both happened anyway. Same with Ireland, same with Portugal. Somehow, I don't place much trust in their denials. Boy who cried wolf sound familiar?

You might have a point if Greece leaving the Eurozone would make sense. Why do you think it does, considering it will wreck the greek economy?

Because the people of Greece are not happy with the way their government handled the "bailout"? Sure, popular unrest and those pesky unions marching in Athens may sound like no big deal (Glory to Sarkozy the Mob Crusher, everyone should do the same), but maybe it's bigger than it seems.

[J]

You might have a point if Greece leaving the Eurozone would make sense. Why do you think it does, considering it will wreck the greek economy?

You need to think longer term. Greece will find it very difficult to impossible to continue paying its debts in the future even with Eurozone support via various loan packages. That debt becomes a larger & larger drain on their economy as time goes on since interest must be paid and Greece continues to run large deficits which requires selling yet more debt at higher interest costs. That debt burden and its associated interest cost is growing at around 10% a year and will continue to do so unless a miracle happens. There is no way Greece can grow its GDP at a matching or higher rate, thus a default is baked it, not this year, probably not next year, but it will happen, the math doesn't lie. The market has priced it in at somewhere between 2-5 years.

Since a default is mathmatically guaranteed, the question then becomes whether to default & restructure on their own terms while things are relatively under control or wait until the default & restructuring is forced upon Greece in the future on other countries' terms. If it's done now they'll take a massive hit similar to Iceland, yes it will wreck their economy for the next few years, yes there will be a lot of suffering and drops in living standards. But it allows them to build an economy going forward which is free of debt obligations and where capital is reinvested into the country for the people instead of leaving the nation to pay off foreign bankers. A forced default in the future may not allow that, as noted in the last article I posted there's now talk of demanding collateral for future loans; default on those loans and someone else now owns a piece of Greece.

I point to Iceland once again, they decided to default and flip the bird to EU bankers, they were hammered for it but they're now close to stabilizing at their historical pre-bubble GDP. They're now in control of their own destiny, they don't need to send 1/3 of their tax revenues to foreign countries & banks every year, they don't have foreign parties telling them how to run their economy (austerity measures anyone?), they're free to do what's in their own best interests.

[Thanas]

Because the people of Greece are not happy with the way their government handled the "bailout"? Sure, popular unrest and those pesky unions marching in Athens may sound like no big deal (Glory to Sarkozy the Mob Crusher, everyone should do the same), but maybe it's bigger than it seems.

Screw them. They have one of the cushiest lifestyles in all the Eurozone, the comfiest retirement plans etc. on one of the smallest economie there is. I know you want to frame everything as a kind of class warfare, but this is not a thing like that. It is time the greeks start living according to their means, not hope for handouts from Germany.

Or are you actually arguing their livestyles are in any way justified by their economic performance?

[J]

It is time the greeks start living according to their means, not hope for handouts from Germany.

And what would be the easiest way to make them live within their means?

[Thanas]

It is time the greeks start living according to their means, not hope for handouts from Germany.

And what would be the easiest way to make them live within their means?

Turn Greece into a European colony? No seriously, what are you saying here?