Germany and the eurozone leaders are currently discussing the possibility of letting greece default, and throwing them out of the Euro.
They will ensure before this happens that the EFSF has enought money in it to prop up the banks (mostly french) that are bigtime exposed to greek sovereign debt, hence stopping the rot as close to the casue as possible.
When greece defaults there will be a market rout, but as long as the EFSF fund is big enough (and I strongly believe it will be as they know they only have one chance at this) this rout will be reversed.
People will then take a breath, look at what's left of the Eurozone, and, I think, start creeping back into the market for long bets.
And geeece? well, the negative impact of not being able to go to the markets for loans might well be negated by the international competitiveness benefits of getting thier own currency back.
This is too simple. A default of Greece is one of the possible solutions of the problem. But this does not mean that they need to leave the Euro. If I am defaulting on my mortgage, I won't be creating my own currency either.
Let me come back to this in detail. There are two different cases:
(a) countries like the US and Japan who have the privilege of borrowing in their own currency
These countries cannot default on their loans, because they can easily activate the printing press and deflate their debt by inflating their currency
(b) smaller countries who have to borrow in US-$ or Euros
All countries who have to borrow in a foreign currency - an this includes Germany, France, Greece and Porrtugal - cannot deflate their sovereign debt by using the printing press. Either they have to pay service and back their sovereign debts, or they will default. Russia and Argentine defaulted, because they were indebted in US-$, as nobody was willinng or able to lend them money in rubles or pesos.
The usage of a common currency implies that none of the countries using it can switch on the printing press to compensate Ponzi financing. However, Ponzi financing is a tradition in Southern Europe.
A default of Greece is a clean cut, but would not lead the reintroduction of the drachma. The only valid reason to reintroduce the drachma would be to avoid budget discipline in the future, allowing the government to make easy use of the printing press. Imagine, how the Greek employes will react, if it is announced that they will get paid in drachmae? They will protest even more than today, and will simultaneously try to shift all their riches abroad to save them from being converted into drachmae. The drachma will never start working again.
It is an illusion that Greece will leave the Eurozone. They can't. Greek policy makers just have to learn that Greece has to repay its debt as everybody else has to do. A structured default of Greece is a likely scenario. It will hurt current bond holders, but help Greece to exit the Ponzi scheme.
Did you try to find out who holds those € 340 million of Greek bonds? Go and short the stocks of the investors and avoid to invest into funds that are long Greek bonds.
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Yes, a Greek default will create a squeeze in the financial markets. Some of the owners of Greek bonds will have to examine their inventories for bonds stemming from other Ponzi schemes. After the necessary mark down to market value, they will then find out that they are bankrupt.
Meanwhile the other participants in the financial markets will try to figure out, who is bankrupt and who is not. So they won't be lending money to each other. Libor and the TED spread will go up, the commercial banks will not lend to each other and the central banks will need to inject new money to compensate for the unwillingness of other financial institutions to create money.
The question is only whether the bubble will be deflated via a negotiated, controlled blast, or whether it will detonate by itself, when politicians are no longer able to pamper it.
This is just the next bubble. It is a sovereign debt bubble, and as all bubbles this one will burst as well.
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Agreed. I believe they should let Greece default, and banks that made wrong decisions should take responsibility for it. Most countries guarantee deposits of citizens up to a certain amount, and they should respect that. It would be much cheaper then bailing out the banks (that are doomed anyway).
Those banks that survive should take proper risk controls in the future, as they should have in the past. It's the only way to "clean" the system, and go forward. Kicking the can down the road works for some time, but sooner or later the problem will be back, bigger then before.
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but I'm confident and really hope they don't. the consequences could be devastating for many years to come. the whole eu would be questionable. have to add I was against the eu from day one, because these kind of problems were very likely to happen.
so, sometimes when you say A, you also have to say B. even if it's wrong.
Euro zone does not equal European union. Even if euro fails (which I hope won't happen), European union would continue to exist. I am pro EU, but this does not mean I would support every decision.
Maybe I don't understand it that well, but I can't see why a few banks, or indeed a country that is only 1.9% of EU GDP defaulting would destroy the euro.
I'm also from a small country, and if by some chance my country defaults (it won't happen, but just hypothetically) I can't see it would have any major influence on world economy. Let's put things in perspective, this Greece thing has been milked for so long it's become ridiculous.
Last edited by Messk; October 10th, 2011 at 11:02 AM.
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Do you think it fair to say that attempts to avoid a Greek default are really to appease the markets ?
It's all a question of maintaining confidence rather than honest solvency ?
Trouble is, on one level countries were to be reprimanded for not keeping their house in order, to deter others from doing so, and now on the other hand, there seems to be an almost green light for doing what ever they want.
ie: no matter how much trouble you get yourself into, the ECB/IMF/EU will find a way to get you the money you need, until the next time you need more. All to appease the "markets".
Is there a point at which this "process" will no longer appease the "market" ?
Or perhaps the market doesn't really care. This is what the market is ?
Just keep betting on a return on your investment until there's no one left to pay or nothing left to pay with.
Not with standing that's it's not their, or real money they are betting with.
It really is a mess..
Every moment I wake up I realize I know nothing, and then I smile...
Last edited by zt379; October 10th, 2011 at 03:58 PM.