Skip to comments.Europe admits Greece exit preparation
Posted on 05/18/2012 2:16:47 PM PDT by bruinbirdman
Brussels is preparing plans for Greece to quit the euro, a senior official has revealed, as analysts warned that the countrys exit would cost European taxpayers at least 225bn (£180bn).
European Union trade commissioner Karel De Gucht said that both the European Commission and the European Central Bank (ECB) were working behind the scenes on contingency plans for a break-up.
Today there are in the European Central Bank, as well as in the Commission, services working on emergency scenarios if Greece shouldnt make it. A Greek exit does not mean the end of the euro, as some claim, he said.
The first public declaration that preparations are in place came as economists at UBS said European taxpayers would have to swallow losses on Greece, whether or not it remains a member of the currency union.
Under a best case scenario, which would see Greece remain inside the euro but its colossal 274bn of outstanding debt put on a more sustainable path, UBS said European taxpayers would have to write-off 60bn of the 182bn of rescue loans they have provided.
If Greece was to leave the euro, however, the bill would jump to at least 225bn as the new currency would halve in value and 104bn of additional emergency funding by the ECB would be wiped out.
Contagion to the banking sector and across the eurozone, coupled with the economic damage that would cause, would lead to further unquantifiable costs. Other economists have estimated the final bill at nearly 800bn. UBS said the losses would cripple the ECB, which would need to be recapitalised.
The International Monetary Fund, which has contributed 22bn to the Greek rescue so far, would probably be treated as a preferential creditor and be protected, the analysts said, so UK taxpayers would not lose out directly.
(Excerpt) Read more at telegraph.co.uk ...
I doubt Greece will voluntarily exit ... they will be pushed out.
“A Greek exit does not mean the end of the euro, as some claim, he said. “
Wrong. When the first domino falls, the rest will surely fall!
This will cost Merkel the election in Germany.
If the EU is the “United States of Europe” and they can kick out members, can we (the USA) kick out our lib states?
Perhaps. But a deep recession in the EU triggered by the issues in Greece and Spain will cause a recession in the U.S. and cost Obama the election here.
I am not wishing for economic troubles, but I see no good way for Europe to make it through this mess.
Personally, I think the weaker countries exiting the Euro would benefit the European economy as a whole. Similarly, Germany exiting the Euro would similarly help. Right now, the stronger EU countries are subsidizing the bad behavior of the weaker EU countries.
60/40 odds that the Greeks wake up on Morning with any remaining deposits denominated in neo-Drachmas where their Euros used to be...and bondholders take an epic haircut.
How soon people forget.
Weimar Germany was an economic basket case with hyperinflation of its fiat (backed by nothing) currency, so a plan was devised to move them to a new, backed by gold currency.
To insulate the new currency, an intermediate currency, also backed by gold and some other commodities, was created. It was not a “common currency”, but just for use by the banks and nations that were Germany’s creditors.
It worked marvelously. The intermediate currency was tightly controlled, so had zero inflation, and it could absorb the hyperinflated currency at a reasoned exchange rate, perhaps a billion to one.
Then once the intermediate currency was stabilized, the new common currency was introduced. Thus Germany went from hyperinflation to no inflation.
Unfortunately, the economic recovery happened just before the Nazis took power. Yet even Hitler did not fiddle with the new currency, and it lasted through WWII, being replaced 1 for 1 by the Deutschmark at the end of the war.
Which lasted until the Euro was introduced.
So what needs to happen to Greece, using this model?
First, an intermediate currency, called, for example, the “Greco”, would be created and controlled by the European Central Bank. It would be backed by both European and Greek commodities, and would only be for use by the banks and the European nations.
It would be tightly controlled by the ECB, which could then sell Greece European market surpluses at a discount, and buy Greek products to sell at a “preferred mark up”. This would do much to balance Greece’s balance sheet.
While this is happening, Greece would print its own, old currency, the Drachma, again. But it would not be exchangeable outside of Greece. So its value would be in keeping local markets and local governments functioning.
And as a “real” currency, Greece could only print as many Drachmas as they could back with taxes. A forced balanced budget. At the same times, Euros in Greece would be worthless. Banks nor major merchants could legally accept them.
Eventually, the Greek economy would find its own balance, while its debts were being reduced. There would no longer be any government largess, only charity.
That sounds a bit like a model for what you're proposing.
“...the countrys exit would cost European taxpayers at least 225bn (£180bn).”
OK, I know the world is upside down, we after all, have an America-hating RaceMarxist as Commander in Chief, but someone please tell me that someone, somewhere is totally pissed off by this.
Not a peep of protest when the Kenyan stuck it to all those GM debtholders.
Maybe I just need to wake up from a bad dream.......
I hope not. But, frankly, I want the Greeks to suffer greatly. They have not learned their lesson. This should serve as a deterrent to other profligate nations, such as the US.
Correct me if I’m wrong, but couldn’t Greece hold a flea market sale to sell off its seaports, parks, airports, state-owned telecomm companies, art galleries and museums?
That’s gotta be worth a few hundred billion.
I don’t want to see Greece go under; I like baklava and gyros.
No, there wouldn’t be street conversion of Euros or Drachmas. The Drachma would be the sole currency of use in Greece. If a European visited Greece, he would have to convert the Euros he wanted to spend into Drachmas to use them in country. Much like any currency is converted.
At the Greek bank level, however, they would function somewhat like US banks with the prime rate from the FED. The ECG would dictate the exchange rate, so if the Greek government started printing more Drachmas than they could back, the Drachma exchange rate would be changed to reflect its inflation *relative* to the Euro.
The function of the Greco would be to stabilize the Greek economy, and somewhat return the Drachma to parity with the Euro.
The bottom line is that it would be up to the Greek government to figure out how to have a balanced budget, since they couldn’t *not* have a balanced budget; while the ECB created a manageable way for Greece to pay off its debt with commodities, while insuring Greece still had imports to feed itself and recover.
In return, the Greeks would have no choice but to economically behave themselves, because you can’t spend money if you don’t have money, and nobody will loan you any money.
That's pretty much how it works in Cuba too. You can't spend dollars (legally) — you have to get them converted to Cuban Convertible Pesos at an official money exchange. These convertible pesos cost a lot more than ordinary pesos & you need them in most places that cater to tourists. It's a way of getting the tourist to pay more than the locals (a lot more) for things. OTOH, the locals aren't able to buy many imported goods — you need to spend convertible pesos in tourist shops to get many imported goods. There are also strict controls on the export of currency.
Largely, this all amounts to a way of disguising the fact that the local currency (peso) is nearly worthless. As the Drachma would likely be, for some time.
A Greek exit does not mean the end of the euro, as some claim, he said.
I have better, Greece can actuality do more damage to Eurozone, then Brussels can even realize, it will be drastic, but will send message, count on it.
I’m thinking that the Greeks can sell off the Pantheon to Disney for $300 million. That’s a start to paying off the debt.
Eros might be worth a few hundred billion. How about Hercules? He can clean out lots of stables, yes?
What’s your idea?
>No, there wouldnt be street conversion of Euros or Drachmas. The Drachma would be the sole currency of use in Greece...
Wrong - there would be an explosion of black market activity that would profit from marketeering in the exchange rate for good and services.
It would be widespread, invite corruption and be very difficult to suppress without fascist methods.
I know you are being funny, but your are asking is like Egyptians should sell the Giza Pyramids, be reall o.k friend.
Maybe how about Goldman Sachs? Why are they so quite on this?
How about idiotic investments made by American Banks through Wall Street? How about Corzine and now JP Morgan loss of 2 billion dollars, how about 780 billion dollars given to banks, now I ask you?
What would you like to sell?
I agree with everything you say, now let’s get down to business:
I’ll give you Goldman Sachs and 900 lampposts to hang them all for a decent gyros franchise.
Seriously, though, if you gotta pay off a debt, selling your assets is a reasonable course of action.
Selling Greek airports, seaports, museums and the Pantheon is a good start.
Ask me if I’m willing to sell the Grand Canyon, the US postal service and the Oakland port.
That only happens when they attempt to violate Gresham’s Law.
“Bad money pushes out good money.” when there are two currencies of different value, people spend the one worth less and save the one worth more.
That is, you get such things when you have two currencies of different values, which is why in this case you have a controlled exchange rate.
At first, Greeks would want Euros instead of Drachmas. But Euros would have limited value in Greece, since they could not be exchanged at banks, nor used by major retail stores. But outside of Greece, a Euro would just be a Euro, and a Greek who bought a lot of goods outside of Greece and wanted to bring it back in would be halted by ordinary customs controls.
And Drachmas would be worthless outside of Greece, unless exchanged for Euros at the going rate.
And all the while, mind you, there would be efforts to create parity of the two currencies.
This is also where it matters that Euros are a fiat currency, but Drachmas would be a reserve currency. This would tend to make Drachmas worth *more* than Euros.
Certainly there would be some black market, but the effort is to make the profit margin for such activities so small that it’s not worth it.
Lets get in to it friend.
Even if you try to sell the Grand Canyon, the US postal service and the Oakland port, the debt is so enormous it makes Greece Arkadias look as a small city.
Problem is Espanola and Italia are moving closer to collapse, economical issues are this in the world:
Rise of unprecedented debt creates on equation of devaluation of currency or purposely keep it above as well moving electronically assets within direverents to adjusts, and sell, in speculative mode is a short done deal, in long term is a disaster, for after all no matter what country you are in assets are base not real hard currency but on speculations, then you have a black hole effect, either you invest hoping on being good gambler your you loose, problem with this is, who has a lucky number.
Thanks for your reply.
What does the word “Salve” mean at the beginning of your posts?
Hi like I would like to say hello
I was in Greece last year but managed to avoid the riots. It could be a lot worse this year--I don't think I would want to visit the country. Tourists from other countries may be wondering how safe it will be. Maybe it will be OK in the small towns.
Greece was supposed to sell $50B of state assets, from communications, water, electricity utilities to railroads, airports to harbors.
They sold about $500M.
Nobody wants the baggage that comes with the property. Greece needs to do the restructuring first (labor laws, property rights, tax collection, legal system, etc., etc.)
not necessarily. Portugal may go out, but no more.
There is no more money to recapitalize anyone. Period.
It’s a tossup as to who goes first, but Spain or Portugal is next. Ireland will follow soon after. The the Euro is dead.