IS GREECE LEAVING THE EUROZONE?

Lots of rumors flying in the last 24 hours over a potential Greek exit at the end of March. This comes via Niel’s Jensen and John Mauldin:

“Greece plans an orderly exit out of the Eurozone according to two sources close to Mr. Papademos, Greek Prime Minister, who spoke on condition of anonymity earlier today.

The sources confirmed that plans are ready to return to a legacy currency given the current circumstances and that such exit would be dealt with, quote “in as orderly a fashion as possible” unquote.

The plan does not come as a surprise but the timing may be surprising to most members and investors while negotiations about a severe haircut with the IIF are still ongoing.

Last year’s announcement by Mr. Papandreou, former Prime Minister, that a referendum would be held to decide whether or not to stay in the Eurozone may have set the precedent for developing a plan that apparently will be set in motion.

The stalemate in negotiations about the depth of the haircut on some of the outstanding Greek sovereign debt, said to be capped at 65-70% while Greece is looking for more concessions, may have set things in motion as the ultimate alternative.”

I don’t know how you pull-off an “orderly” exit.  Especially considering the potential actions from the other troubled countries.  The worry with a Greek exit is the domino effect to Portugal, Ireland, etc.  It’s all rumors for now, but the seafloor might get kicked up as we head into the end of March.  If this is all true it will substantially increase market uncertainty and markets hate uncertainty….

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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • Andrew P

    Does the EU let Greece go and ring fence off the rest of the Eurozone, or does the EU stop Greece from leaving and monetize Greek debt in exchange for a price so high that no one else will dare ask for debt monetization. (If the ECB buys up all the debt and then writes it off, it has been monetized.)

  • http://. Octavio Richetta

    Better leave before they kick you out. I posted reuters link with German plans to take over Greek fiscal autonomy in the previous thread.

  • http://pragcap Michael Schofield

    Markets hate uncertainty bc no one knows what the trade is. Is this a serious report or another game of chicken? It goes on and on and we’re not even done with one country yet.

  • http://macronomy.blogspot.com Martin

    Here is what my good credit friend had to say recently in relation to the Greek situation and a hard default is indeed a possibility:

    “On the Greek Front, I have never seen so many people unknown to most of us, making contradictory declarations… Once you get rid of all the noises and talks, the reality is not rosy! Yesterday evening, Baudouin Prot, BNP Chairman, has declared “Greece creditors have made maximum offer” (average coupon 4% on the new Greek bonds). At the same time, the IMF and Germany are pushing for more losses from Private Investors: a coupon below 3.50 % on the new Greek bonds to be issued, in order for the country to reach a debt to GDP ratio of 120% by 2020.

    In addition, what most market participants seem to have dismissed is the fact that the IMF has “de facto” thrown the towel, not sending a representative to Athens when the ECB and the EU were there…maybe because finally the IMF understand that even with a ratio debt to GDP of 120 % by 2020, Greece will not be able to make it (see how Italy is struggling with such a ratio while its economy is much stronger than the Greek one), and also because even if Private Investors and the Greek government reach an agreement, the road is too long (8 years until 2020) for the country to recover. The risk of Greece imploding is very high as its social fabric is already destroyed…

    Finally, Portugal sovereign debt is under pressure: CDS 5 years above 1,300 … and the 5 years bond is wider by 95 bps against the German bund equivalent. The Greek drama will set a Benchmark in term of debt reduction, and I would not be surprised to see the Portuguese government to ask for some debt relief (restructuring?)

    So…who told you the crisis was over ?! The name of the game is “Solvency” and nothing has been done to address the problems!”

    Best,

    Martin

  • Gaius marius

    So the run on Portugal and Ireland can start forthwith. I don’t think there’s a choice ultimately, as no one seems to be willing to engage in the fiscal transfers that would make the union viable. But no one should be under the impression that anything can be ring fenced short of that commitment. They can delay the problem with the ECB if Germany relents, but they cannot fix it without fiscal transfers, a la those seen between states through the federal authority in the United States.

  • Marketstalker66

    Gentlemen – Greece has mo option but a V – shaped recovery engineered by going to Drachma. It will be excruciantly painful for a couple of years but it will recover after that otherwise within the Euro a deflationary depression for 10 or more years is guaranteed and contagion to the rest of weak euro underbelly is to take place. History always repeats itself. It is Europe’s time- the excesses will correct.

  • http://breedinginstability.com Mountaineer

    I still maintain this was one of the main reasons for the ECB coordinating the LTROs. The banks begged and pleaded for a secure source of financing their unwieldy assets. Capital flight is already taking place, anyone who thinks differently should read this:

    http://www.bloomberg.com/news/2011-09-13/deposit-flight-from-european-banks-means-collateral-risk-piling-up-at-ecb.html

    The ECB has seen the writing on the wall for awhile. The debts cannot be paid; so they won’t be. Someone will have to take the loss, and we get to marvel at international finance’s version of “hot potato” until it is decided who the unlucky chosen are. Still, it has to be restated that the ECB can keep buying the bonds, indeed the ECB’s balance sheet expansion has been truly massive, and so default doesn’t have to cause a banking crisis and credit contraction. It absolutely can, but it’s not inevitable.

  • Ben

    There’s an interesting blog post here about European banks beginning to account for Euros differently by nation state:

    http://blogs.channel4.com/faisal-islam-on-economics/euro-collapse-contingencies-at-davos-is-berlin-listening/16096

    Anyone know how long this has been going on?

  • http://www.wallstreetrant.com Wall Street Ranter

    Let’s hope so……let the inevitable finally happen……

  • Anonymous

    Okay, that gives market participants and CNBC time to think through a positive spin to keep pretending there are no problems out in the world.

  • Jonf

    NYtimes has article saying. Wait for it. There will be announcement in few days. Germans trying to get control of budget,Greeks say no. 3 times in a hundred years is too much.

  • Wantingtoretire

    Bring it on down and lets make money……..

  • that anonymous guy

    There is precious little doubt that Europe willl have ugliness before doing something useful, like equipping the Ecb to make and distribute euros. The crisis of ignorance goes on

  • that anonymous guy

    Yep!

  • Dunce Cap Aficionado

    I thought they saved Europe…..

  • Wulfram

    Whatever, as long as a Greek default does not lead to direct losses at the Federal Reserve. The ECB and Fed need to be held accountable for the repayment of the multi billion dollar swap lines.

    We’ve got enough problems without worrying about some ass backwards country that hasn’t been able to manage its finances for the last couple thousand years.

  • http://. Octavio Richetta

    I have been able to find plenty of news corroborating the story on Germany, and now even the IMF, requiring taking over Greek fiscal autonomy as a condition for the release of bailout founds. This to me is equivalent to icing out the Greeks from the EU.

    I HAVE NOT BEEN ABKE TO VERIFY THE SUBJECT OF THIS POST. I.E., THAT THE GREKS ARE PLANING TO LEAVE THE EU AND THE EURO ANYWHERE ELSE, NOT EVEN AT ZH OR GREEKCRISIS.COM

    ANY COMFIRMATION IS APPRECIATED.

  • beowulf

    I thought they saved Europe…

    Nahh, the US Army owns that franchise. The purpose of NATO, as the saying goes, is to keep the Russians out and the Germans down (and ever since Eisenhower, the Supreme Allied Commander Europe has always been an American). So if nothing else, Greece doesn’t have to worry about Germany using gunboat diplomacy to collect its debts.

  • flo

    I also think that the recent german demands on greece serve a dual function. One is to placate german voters (we are tough on greece!), the other is to pressure greece into leaving the zone voluntarily. The german government does not want to “force” another country out of the zone.

  • AndyB

    there is this story http://www.telegraph.co.uk/finance/financialcrisis/9047124/Brussels-takes-control-of-taxation-and-spending-in-eurozone-countries.html

    This is saying that Brussels will be taking over the whole of the eurozones taxes/budgets
    of course that is the telegraph which is strongly anti integration so take your pick on wether its correct or not

    Personally of course following this sort of economics its the only way, democracy wise though ouch it looks like a power grab… fortunately the UK stayed out so its up to the eurozone countries

  • Mercator

    Absolutely. EU leadership is terrified that an exit and relatively short recovery of 2-3 years will encourage others to do the same. That is the contagion they fear, not default and simple write-off. Once the pendulum start it’s motion, nothing can stop it. The euro is very very fragile, and maybe a dead currency circulating.

  • jt26

    “default imminent” is a greek negotiating tactic …. the background work is being laid though … expect 2014 just before or after german elections … denial and the limits of greek/PIGS austerity haven’t been exhausted yet.

  • http://. Octavio Richetta

    So, a good contrarian view, or just some frivolity is search of exposure?

    http://www.voxeu.org/index.php?q=node/7568

  • dgc

    I think that I have an answer. Greece is probably faced with a decade or more of economic disaster if they stay within the Euro or an even greater but shorter term disaster if they leave. The Greeks should vote on it, preferably by the end of February. Let them decide what to do.

    In the meantime, the deeply unpopular and unelected Greek government could use the next month to work toward an “orderly default” whether Greece leaves the EU or stays in the EU.

  • pebird

    Since the debt renegotiations are not progressing, this could be a negotiating ploy (float a rumor of bondholders getting 0%). If this turns out to be official – they better have a plan in place to move quickly.

    As long as the Greece banking system allows deposits to be held in more than one currency, they could do a soft transition, requiring taxes payable in dracma 2.0, while allowing consumer prices to be posted in both Euro and dracma.

    The interesting thing would be to see how the government would get currency issued (via what kind of spending) and the effect it would have on the economy. A real life MMT experiment, what fun!

  • lairdwd

    Let’s see if a CDS event is triggered and if Greece will exit the Eurozone, and see how that’s digested . Portugal appears to be on the ropes too. All this liquidity induced bullishness on low volume is great, but ponzi’s tend to let go fast, and this bullish uptrend could be stopped dead in it’s tracks. The CDS market is waiting to be exposed for what it is – a highly leveraged, poorly understood multi-trillion dollar gambling mechanism with long chains of counter party risk. Break one link in the chain, and all heck breaks loose.

  • http://pragcap Michael Schofield

    Octavio that seems plausable although nothing at this point could be called likely. Successful outcomes for the euro always have something to do with Germany writing a really big check which only solves the present crisis. No one ever mentions how a fiscal union would work. I’ve read somewhere that German citizens are much more concerned about inflation than they are recession because of a high savings rate, mostly in government bonds. So they will take their chances with unemployment before inflation. I would very much like to hear comments from our German friends, since it appears that you folks hold the key.

  • http://. Octavio Richetta

    I just read one of hose tabloid pieces at businessinsider that said the cost of leaving the EU for a country is not as high as the fearmonguers have been saying all along. IMO, at some point in time the market is actually going to start attaching a positive NPV at breakup/zombie countries leaving; and, thus, the current efforts to continue the unworkable marriage will start being a drag on the market. The key is how far are we from this point are we? (my guess is that we re still very far) of course, whatever the course of action, the sovereign debt black hole will not disappear. The euro fairy tale is over.

  • jake

    By far the best news I’ve heard in a while. Leaving the euro is the only possible way to reverse the recent coup in greece.

  • Blobby

    My vote is hard default and remain in the euro.

    Instant balanced budget, but zero national debt :)

  • http://riskandreturn.net Lance Paddock

    mercator, I suspect you are right, and have felt that way all along. If the Eurozone is to survive it will shrink and it will integrate much more fully. I don’t think they want to (and unlike Cullen I think that is reasonable and as good an outcome, and possibly better than integration) so I doubt it survives except in rump form (though that could be a decade or two down the road.)

  • http://pragcap Michael Schofield

    I nominate that idea for the “outlier trade of the day”. Nothing is stopping them from doing it.

  • DVWilliams

    The current plan is for internal revaluation: ie, Greeks take a nominal pay cut.

    If Greece defaults and stays in the Euro, Greeks will have to take a deflationary pay cut, but without the funding support of the IMF and ECB. This cut would have to take place on day 1, rather than being phased in, in accordance with the current plan.

    “Orderly” transition looks impossible. As soon as this idea is suggested with any degree of credibility in Greece there would be an instant run on the banks and the ports and airports would be full of people with suitcases full of money. The new drachma would fail in a hyperinflationary event immediately as everyone tried to change it into Euros and hide the money in Germany or Switzerland.

    Or they put on border guards and stop people leaving the country. Station armed guards outside banks and stop people withdrawing Euro notes or stamp all the currency, making a stamped Euro note a new drachma.

    All of which sounds like a recipe for a riot.

    Residents of any other peripheral nations seeing this would also be packing the airports with their suitcases full of notes, causing runs on banks in their respective countries.

    The one thing that I really don’t understand about the Euro situation is the mechanics of the inflationary solution. I have tried on a number of occasions to understand the ECB’s capital position and the target2 system, all to no avail. The detail of how the ECB could effectively write off periphery debt doesn’t appear to have been explained by anyone, only through vague remarks about the ECB printing.