Photo: US Navy
Greece might have to quit the euro zone for a time if the country failed to tighten its belt sufficiently to qualify for emergency aid, a budget expert with Germany’s junior coalition party said on Tuesday.
A temporary exit from the single currency might benefit Athens if accompanied by a devaluation, the Free Democrats’ (FDP) Juergen Koppelin told Deutschlandfunk radio.
This makes total sense except for the “temporary” part. You have to figure that once Greece is gone and goes back to Drachmas, we’re talking years and years before they’re back.
But Koppelin’s motives go beyond merely not wanting to bail out Greece.
Per the Eric Sprott piece we cited last night, there are fears of a run on Greek banks, and it may come to the point that savers in other marginal countries like Portugal and Spain also decide to pull their cash, and put it into other countries banks, or at least gold.
And if that alone isn’t worrisome enough, read Felix Salmon’s piece with some anonymous plugged-in sources. He brings up several points, but the nut is this:
Where would Greek debt trade in the event of a default? This is the scariest thing: my highly plugged-in companions both agreed that it wouldn’t just fall to 70 or even 60 cents on the dollar: they saw fair value closer to 40, and said that it would probably fall to 30 before people started buying.
Needless to say, if Greek debt was trading at 30 cents on the dollar, it wouldn’t take long for the Portuguese domino to topple. After that, Spain — and then, it’s easy to imagine, Italy, Ireland, UK. And so the stakes are very high: it’s certainly cheaper to bail out Greece with virtually unlimited funds than it is to risk a fully-blown PIIGS default. But there does seem to be the hope or expectation that a line could get drawn in the Iberian sand, and that Italy and Ireland would not be allowed to default even if Portugal and/or Spain imploded.
Good luck drawing that line in the sand. If there’s one thing we’ve learned, it’s that the best intentions of leaders are powerless to stop economic reality.
Of course, if Greece won’t leave the euro, Germany just might.
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