Greece Will Exit The Eurozone in March; Return to The Drachma
Rumor is circulating that Greece will exit the Eurozone in March to return to managing its own currency, the drachma. This will be announced at the time of the EU finance ministers meeting, and will attempt to be "orderly", but who knows what chaos it will bring.
Greek debt bailout negotiation keeps coming up like a bad penny. There have been at least three major bailouts already, and all parties are getting tired of Greece’s lack of fiscal discipline. To be fair, as Greek tries to implement austerity programs, tax revenue declines because austerity slows the Greek economy. That is a big Catch-22 with European countries — their governments are such huge portions of their economies that austerity means economic slowdown, recession, or for Greece a possible depression. If government were only 5% of the economy rather than 55% of the economy, austerity would be a positive; currently though austerity means economic slowdown, which means lower tax revenue, which means more austerity. It is a vicious cycle.
The current negotiations are offering private bond holders to return about 30% of their principal. That is a major haircut. Imagine losing 70% on your investment. Their leverage is to not agree to the terms, and currently they are asking the ECB and IMF to step in and shore up Greece to pay the bondholders. However, if you are the ECB or the IMF, and you bailout a country because they ask (and that means the country can be reckless one more time), then there are other countries lined up at the door for a bailout rather than impose their own austerity measures.
Without a bailout and facing very challenging austerity measures if Greece stays with the euro, Greece’s is only way out — and the consequences are unpredictable — is for Greece to leave the euro so it can devalue its currency to attract investment. An alternative is for all Greek workers to take a 30% paycut immediately and for government payments to be cut by 30% over the next two to three years. The Greek pensioners would throw out their government. However, when Greece exits the Eurozone, it will simply default on its government bonds. Those bonds are largely held by banks as capital against which those banks loan money. The capital of many banks will be impaired by Greek exiting the eurozone. There will be a mini financial crisis until most of the bad debt is recognized.
Greece has a long history of defaulting on its debts so historically this is nothing new. Greece has defaulted on its public debt five times over the last 200 years: in 1826, 1843, 1860, 1894, and in 1932. However, a default would presage a drift away from the euro for any other country that would be required to impose austerity to pay its debts denominated in euro. That means a possible break-up of the Eurozone.
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