Greece is considering withdrawal from the Euro-zone (rumour)

This is my translation of an article from the German magazine Der Spiegel (Hat tip Stephan)

By Christian Reiermann

The debt crisis in Greece is getting worse. According to information available to SPIEGEL ONLINE, the country’s government is considering leaving the euro zone. The monetary union’s finance ministers and representatives of the EU Commission will meet this Friday evening in a secret crisis meeting.

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Greece’s economic problems are huge: almost daily civilians protest against the government. Now Prime Minister George Papandreou apparently sees no other way out. According to information available to SPIEGEL ONLINE, his government is considering abandoning the euro and reintroducing its own currency.

Alarmed by these efforts, the European Commission called for an emergency meeting in Luxembourg on Friday evening. The meeting will be held at the Château de Senningen, which is used by the Luxembourg government for official events. Alongside the possible withdrawal of Greece from the monetary union, an imminent restructuring of the country’s debt is on the agenda. A year after the outbreak of the crisis in Greece, the European Monetary Union is at an existential turning point – regardless of what option they choose.

Because of the tense situation, the highest confidentiality has been ordered for the meeting in Luxembourg. Only the Finance Ministers and one close associate may attend. For Germany Finance Minister Wolfgang Schäuble (CDU) and Financial Secretary Joerg Asmussen will participate.

Schäuble wants to keep the Greeks from leaving under all circumstances. An internal presentation from his ministry, which he took to Luxembourg, warns of the consequences. "It will lead to a significant depreciation of the new domestic currency against the euro," it states. Estimates are for an exchange rate loss of up to 50 percent to be expected, thereby, increasing the debt burden in Greece dramatically. Schäuble’s experts expect that the national debt would increase to around 200 percent of gross domestic product following the devaluation o. "A restructuring would be inevitable," they warn. Put simply, Greece would be bankrupt.

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Massive implications for the economy in Europe

It is debatable whether Greece’s exit from the euro would even be legally permissible. In the opinion of legal experts,the country  would have to leave the European Union altogether at the same time. It is actually doubtful whether the other members of the Monetary Union would permit a unilateral withdrawal from the euro area by the government in Athens.

What is certain is that the measure would have a massive impact on economic life in Europe, according to the judgment of Schäuble’s people. "The currency change would trigger capital flight," they write. Greece may be forced to introduce capital controls. "This would be at odds with the fundamental freedoms of the single market." Moreover, the country would be cut off from the capital market for many years.

Furthermore, the withdrawal of a country from the monetary union, "would severely damage the trust in the functioning of the euro zone," it said. International investors would have to expect other members would want to leave in the future. "This would lead to contagion effects in the euro zone."

The German taxpayer would pay dearly

Greece’s cutting loose  would have a severe impact on still ailing banking sector, especially domestically. Through the currency cut "all of the equity in the banking system would be eaten up; the country’s banks would immediately be insolvent." But the banks in other countries would suffer. "German and foreign banks would have to expect substantial losses on their claims," says the paper.

The European Central Bank (ECB) would also be affected. It would have to "write off a substantial portion of its assets as uncollectible." Along with the loans to banks would be added the stock of Greek government bonds, which the ECB has bought in recent months. Schäuble’s people estimate the amount at at least 40 billion euros. "Germany would contribute the largest share of the losses according to its ECB capital share of 27 percent."

The bottom line is that a euro exit by Greece would result in the country’s bankruptcy and would be costly for the Euro countries and their taxpayers. Together with the International Monetary Fund, they have granted the country assistance amounting to 110 billion euros – around half of which has already been paid out. "After the bankruptcy of the country, the euro-zone countries would have to write off a portion of their claims."

Source: Griechenland erwägt Austritt aus der Euro-Zone – Spiegel

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1 Comment
  1. DavidLazarusUK says

    There is a lot of talk of Greece being excluded from capital markets for many years. That is unlikely, just ask the latin american nations. What Greece could do is convert euro debt to greek debt at the rate of €1 ri the drachma so imposing huge losses on greek held euro debt. Plus with Greece able to print its own currency again it could simply print off all the money it needs to clear that debt, in drachmas effectively wiping out that liability. That would impose near 100% losses on greek debts for their holders. The impact of such losses would mean that the CDS market would struggle under the payouts, which might be many times the total greek debt. The nightmare for the core nations of the Eurozone was if this succeeded then they could expect the rest of the periphery to follow suite. Then the losses in the core nations banks would wipe them out, or force the governments to abandon rescue efforts. Greece has far more power than it realises, the losses that the germans would suffer would be huge, as there would almost surely be large CDS payouts as well.

  2. Anonymous says

    There is a lot of talk of Greece being excluded from capital markets for many years. That is unlikely, just ask the latin american nations. What Greece could do is convert euro debt to greek debt at the rate of €1 to the drachma, so imposing huge losses on greek held euro debt. Plus with Greece able to print its own currency again it could simply print off all the money it needs to clear that debt, in drachmas effectively wiping out that liability. That would impose near 100% losses on greek debts for their holders. The impact of such losses would mean that the CDS market would struggle under the payouts, which might be many times the total greek debt. The nightmare for the core nations of the Eurozone was if this succeeded then they could expect the rest of the periphery to follow suite. Then the losses in the core nations banks would wipe them out, or force the governments to abandon rescue efforts. Greece has far more power than it realises, the losses that the germans would suffer would be huge, as there would almost surely be large CDS payouts as well.

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