Should I Stay Or Should I Go

The title was the big hit by The Clash. Its not so much about Greece leaving the E.U., its about the countries that "can" follow after that. If Greece "can" leave, Portugal and Spain could follow. Greece in itself is a small problem to the rest of the world. However, the Greeks will HAVE TO take their medicine one way or another - by following the austerity measures set by E.U. or go it alone. The former will see tightening of belts but in a controlled manner. The latter will see massive hyper inflation and devaluation of the drachma. Just remember Argentina and Indonesia.

Once the rest actually sees how tough it is for Greece to go it alone, I don't think ANY other country would want to risk leaving E.U.


But what we all want to know is how it will affect the local markets. Have to go down in sympathy for at least a day. I don't see how, why, this can drag the rest down. If anything, funds will flow out of Europe to other stabler performing regions. This event does not qualify as a reason or catalyst for a sustained bearish sell down.


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Europe's ruling elite is now openly talking about whether Greece might leave the euro, breaking a 2.5 year taboo.

The German Chancellor, Angela Merkel, and the EU President, Jose Manuel Barroso, were among those saying that if Athens could not abide by the rules they would have to leave.

Here three experts analyse the potential consequences – collapsing banks, soaring inflation, but also look at the possible salvation.

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Costas Lapavitsas

Professor of economics, School of Oriental and Asian Studies, University of London

Greek exit from the euro is approaching and it has little to do with state incompetence. The fundamental reason is cumulative loss of competitiveness for Greece and other peripheral countries, mostly because Germany has kept its labour costs frozen for years.

Since 2010 things have become worse as austerity increased the burden of debt across the eurozone. Greece can no longer handle the discipline of European monetary union, and Portugal, Ireland and Spain are likely to follow.

Greek default and exit would remove the pressure of debt, boosting competitiveness, lifting austerity and allowing for proper restructuring of the economy and society. In the medium term the results would be better, but in the short term the shock will be severe – made worse by two years of "rescue", which will have brought 20 per cent contraction of GDP and 25 per cent unemployment by the end of this year.

The first step for Greece should be to denounce the bailout agreements and default on its debt, opening the path for aggressive cancellation. Exit will follow, presenting three sets of problems: monetary, banking and commercial. The main difficulty of policy would be to keep these separate as far as possible.

Briefly put: the return to the drachma should be sudden, accompanied by a short bank holiday and immediate imposition of capital controls. For a period the new drachma would circulate in parallel with the euro and possibly other state fiat money.

There are €35 billion ($45 billion) of banknotes in Greece, mostly under mattresses. If they could be mobilised, a lot of problems would be made easier.

Banks would find themselves in the firing line as assets and liabilities would have to be converted. To protect depositors, but also to control credit in order to prevent a wave of company bankruptcies and support employment, banks should be immediately nationalised.

The Bank of Greece should rapidly build mechanisms to generate liquidity independently of the European Central Bank.

The exchange rate of the new drachma would collapse in the open markets, making it difficult to secure supplies of oil, medicine, foodstuffs and other goods. As far as possible, the exchange rate should be managed; there should also be administrative controls to ensure that vital goods reached key enterprises as well as the weakest during the first critical months.

After the initial shock, the fall in the exchange rate would prove positive for the economy. Greece remains a middle-income country with a substantial productive sector that could recapture the domestic market once imports became more expensive. There is plenty of productive potential in Greece.

What the country truly needs is an industrial strategy as well as redistribution of income and wealth. That is also why default and exit are necessary.

Nick Parsons

Head of strategy at National Australia Bank, London

The choices facing Greece are deeply unattractive. On a three- to five-year time horizon, there is no policy option that will turn a bad situation into a better one, and the likelihood is that it will become even worse for many of its people. If Greece stays in the euro it faces a long, slow depression in an effort to remain solvent. If it exits, it could see the collapse of the domestic banking system, the decimation of private savings and a crippling increase in the cost of imported goods and energy.

Greece could claw back some competitiveness through devaluation, making its exports cheaper. But the markets would demand devaluation, and then some. The drachma was fixed at 340 to the euro when Greece joined the single currency. But if a new drachma is introduced at parity with the old currency, then €1 would quickly buy about 1000 drachma, or possibly even more.

Just look at the evidence of Argentina, which in 2002 decided to abandon the fixed 1:1 US dollar-peso parity, which had been in place for 10 years. A provisional "official" exchange rate was set at 1.4 pesos per dollar, but within six months the market rate had jumped to 3.90. The peso had lost almost 75 per cent of its value. Savings were effectively expropriated and import costs tripled. It was a far from painless transition.

A similar fate awaits a post-euro Greece, with capital controls, border controls, and a potential EU exit.

But a Greek exit does not mean the end of the euro. It will, instead, mark a new beginning. Germany has a long and proud tradition of currency strength, but it could not cope with going back to the deutschmark because it would rocket in value and destroy the country's competitiveness.

About 97 per cent of the eurozone's population will continue to use the single currency and their leaders will circle the policy wagons to protect what is left.

A Greek exit could be the trigger for a stronger and more stable euro, led by politicians and institutions with a clear interest in both its success and theirs. After a very difficult summer, should Greeks choose self-determined, rather than European-imposed pain, the outlook for financial markets should be much brighter by the year end.

Ray Barrell

Professor of economics, Brunel University, London

Should we stay or should we go? This is the question Greek voters must now ask themselves. Each must do a careful cost benefit analysis, looking at the gains from being in the euro and the European Union against the costs of leaving. If the Greeks leave and default on the rest of their debt, there is a good chance they may not be welcome at the European Union's tables. The benefits of leaving are transitory, while the benefits from staying may be permanent.

On balance, the advantages would press the Greeks to stay. Some of the advantages of being in the EU could be kept with an association agreement, such as Norway has, but it would be harder to influence trade and competition policy, and subsidies would dry up.

The euro raised growth in the past. Leaving the EU would mean slower growth for a period. Similar estimates exist for the benefits from monetary union for the core countries, but these benefits from increased flows of investment and greater competition still lie in the future for countries such as Greece.

Their potential would be lost on exit, and if there were no benefits from leaving, the Greeks would be poorer in future than if they had stayed.

The gains from leaving would be immediate, with a devaluation restoring competitiveness and raising employment. However, borrowing costs and inflation would climb and be more variable with a floating currency. The need to reform the labour market would be less pressing, and raising the retirement age from the lowest in Europe could be delayed. But taxpayers would soon have to face the reality that they would have to pay for those pensions and support all the other structures that need reform.

Economists normally advise that bygones should be bygones, but this might be the time to remember past favours. Outside the euro the Greeks would not have been able to borrow 200 per cent of their GDP to finance a higher living standard, and restructuring their debts would have been more expensive.

Read more: http://www.smh.com.au/world/what-happens-if-greece-exits-europes-single-currency-20120515-1ynvo.html#ixzz1uthxvulG

European Union Financial System Might Be Even Worse Off

The media tend to focus on the credit crisis too much on just the US and maybe the UK. Even the secondary focus was largely on how China would figure in being a catalyst for recovery. There are pockets of the world that are facing the crisis with more devastation, and urgency for help. In a sense for them, its should be called a debt crisis rather than a credit crisis. We are talking of Eastern Europe, Western Europe, Russia and Ukraine... hey, basically the EU. Most of what's written below was taken from The Telegraph, UK.

In much of Western Europe, things are nearing boiling point. Austria's finance minister Josef Pröll made frantic efforts last week to put together a €150bn rescue for the ex-Soviet bloc. Well he might. His banks have lent €230bn to the region, equal to 70pc of Austria's GDP.

"A failure rate of 10pc would lead to the collapse of the Austrian financial sector," reported Der Standard in Vienna. Unfortunately, that is about to happen.

The European Bank for Reconstruction and Development (EBRD) says bad debts will top 10pc and may reach 20pc. The Vienna press said Bank Austria and its Italian owner Unicredit face a "monetary Stalingrad" in the East. Mr Pröll tried to drum up support for his rescue package from EU finance ministers in Brussels last week. The idea was scotched by Germany's Peer Steinbrück. Not our problem, he said. We'll see about that.

Eastern Europe has borrowed $1.7 trillion abroad, much on short-term maturities. It must repay – or roll over – $400bn this year, equal to a third of the region's GDP. Good luck. The credit window has slammed shut.

Not even Russia can easily cover the $500bn dollar debts of its oligarchs while oil remains near $33 a barrel. The budget is based on Urals crude at $95. Russia has bled 36pc of its foreign reserves since August defending the rouble.

In Poland, 60pc of mortgages are in Swiss francs. The zloty has just halved against the franc. Hungary, the Balkans, the Baltics, and Ukraine are all suffering variants of this story. As an act of collective folly – by lenders and borrowers – it matches America's sub-prime debacle. There is a crucial difference, however. European banks are on the hook for both. US banks are not.

Almost all Eastern bloc debts are owed to West Europe, especially Austrian, Swedish, Greek, Italian, and Belgian banks. En plus, Europeans account for an astonishing 74pc of the entire $4.9 trillion portfolio of loans to emerging markets. They are five times more exposed to this latest bust than American or Japanese banks, and they are 50pc more leveraged (IMF data).

Spain is up to its neck in Latin America, which has belatedly joined the slump (Mexico's car output fell 51pc in January, and Brazil lost 650,000 jobs in one month). Britain and Switzerland are up to their necks in Asia.

Whether it takes months, or just weeks, the world is going to discover that Europe's financial system is sunk, and that there is no EU Federal Reserve yet ready to act as a lender of last resort or to flood the markets with emergency stimulus. The European Central Bank already needs to cut rates to zero and then purchase bonds and Pfandbriefe on a huge scale. It is constrained by geopolitics – a German-Dutch veto – and the Maastricht Treaty.

It is East Europe that is blowing up right now. Erik Berglof, EBRD's chief economist, said that the region may need €400bn in help to cover loans and prop up the credit system. Europe's governments are making matters worse. Some are pressuring their banks to pull back, undercutting subsidiaries in East Europe. Athens has ordered Greek banks to pull out of the Balkans.

The sums needed are beyond the limits of the IMF, which has already bailed out Hungary, Ukraine, Latvia, Belarus, Iceland, and Pakistan – and Turkey next – and is fast exhausting its own $200bn (€155bn) reserve. We are nearing the point where the IMF may have to print money for the world, using arcane powers to issue Special Drawing Rights. Its $16bn rescue of Ukraine has unravelled. The country – facing a 12pc contraction in GDP after the collapse of steel prices – is hurtling towards default, leaving Unicredit, Raffeisen and ING in the lurch. Pakistan wants another $7.6bn. Latvia's central bank governor has declared his economy "clinically dead" after it shrank 10.5pc in the fourth quarter. Protesters have smashed the treasury and stormed parliament.

In almost every way, this is much worse than the Asian financial crisis in the late 1990s, as indicated by the table below. There are accidents waiting to happen across the region, but the EU institutions don't have any framework for dealing with this. The day they decide not to save one of these one countries will be the trigger for a massive crisis with contagion spreading into the EU. The governments and ECB cannot risk NOT saving any one country or banking institution, but that strategy is drawing almost all the reserves and ammunition these institutions have.

Europe is already in deeper trouble than the ECB or EU leaders ever expected. Germany contracted at an annual rate of 8.4pc in the fourth quarter. Germany will have shrunk by nearly 9pc before the end of this year. This is the sort of level that stokes popular revolt. The implications are obvious. Berlin is not going to rescue Ireland, Spain, Greece and Portugal as the collapse of their credit bubbles leads to rising defaults, or rescue Italy by accepting plans for EU "union bonds" should the debt markets take fright at the rocketing trajectory of Italy's public debt (hitting 112pc of GDP next year, just revised up from 101pc – big change), or rescue Austria from its Habsburg adventurism.

Hungary’s forint fell to an all-time low in recent days, and Poland’s zloty slumped to the lowest in five years on plunging industrial output. Half of all loans to the private sector in Poland are in foreign currencies so borrowers face a severe debt shock after the 40pc fall of the zloty against the euro since August.

There are contagion worries for Western banks that have lent $1.74 trillion (£1.22bn) to the ex-Soviet bloc -- split between $1 trillion in foreign loans and $700bn in local currency debt through subsidiaries. Austria’s banks are the most exposed with the share of risk-weighted assets tied to the region reaching 54pc for Raffeisen and 38pc for Erste Bank. The exposure of Germany’s Bayern Bank is 48pc, Italy’s UniCredit is 45pc, and Swedbank is 29pc.

The region needs to roll over $400bn in foreign debts this year, equivalent to a third of total GDP, raising concerns that it may need a massive rescue programme from the International Monetary Fund and the European institutions.

p/s photos: Elva Hsiao