By Sober Look

As discussed earlier, Greek exit from the Eurozone may be the only way the nation could gain some control over its monetary system. Given the complete “credit isolation” of Greece’s banks and the private sector from the rest of the Eurozone, the ECB is powerless to improve liquidity conditions in that nation. Some of the ECB’s policymakers are beginning to agree.

Reuters: – A Greek exit from the euro zone would damage confidence in the single currency bloc but not necessarily be fatal, Irish central bank chief and European Central Bank policymaker Patrick Honohan said on Saturday.”

Intrade probability of at least one nation exiting the Eurozone (basically Greece) before the end of next year has spiked in the past few days, approaching 60%. This agrees quite well with numerous other forecasts by a number of Wall Street firms.

But the exit will cost the Eurozone more than just “damage of confidence” that Patrick Honohan alluded to in his comments. There would be some serious financial damage to the Eurozone/EU and the IMF. The exit will be far more painful than simply converting to drachma (as many believe), even though some preparations for this eventuality are already under way. The problem with this conversion is that all of Greece’s external liabilities would need to be converted to drachma as well. Let’s take a quick look at some of these external liabilities:

  • The May 2010 Eurozone/IMF loan: €110 billion
  • The October 2011 Eurozone second loan: €130 billion
  • The Bank of Greece TARGET2 liabilities to the Eurosystem: €104 billion
  • Greek banks’ liabilities to other nations in the Eurozone: €130 billion
  • Greek new government bonds held by non-Greek Eurozone/EU banks: €25bn (roughly; possibly more)
  • Plus Greek corporate and household debt held by non-Greek Eurozone banks

This is at least half a trillion euros of debt to other countries that would suddenly become denominated in drachma. And within a short period of time, the EUR-GRD exchange rate would likely double if not triple. With its current recession, the Eurozone can hardly afford such a massive hit. That is why other Eurozone leaders are reluctant to openly discuss Greece exiting the union. But given the political turmoil in Greece, the Eurozone may not have much of a choice.


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Sober Look

Sober Look

Sober Look was founded by Walter Kurtz, a New York based hedge fund manager and credit markets specialist.

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  1. Why would Greece’s external obligations need to be converted to Drachma if Greece leaves the euro area? The denomination of legal tender in Greece, and the denomination of its external debts seem two separate issues to me.

  2. Because Greece would have zero ability to service any external debt in a currency it could not print. It would be redenominate or default. The government of Greece would redenominate at a rate it sets, and no one outside Greece would like it.

  3. It should be possible for Greece to go to the Drachma without changing the denomination of its external debts. Greece will have a much easier time paying off its external debts in euros after its internal obligations become Drachma denominated.

  4. No more bets for Greek euro exit

    Want a flutter on Greece leaving the euro zone? It may already be too late. A surge in bets has forced Britain’s biggest bookmakers William Hill Plc and Ladbrokes Plc to suspend betting on the odds of Greece dropping out.


  5. What would be the point of converting to Derachma, taking all the pain associated with it, and leaving the outside creditors whole. The whole idea, goal of this is debt write off, so they will write off/default. The mess that comes later can be solved=or not=like Argentina did, and other defaulters before-issue new bonds with lower interest, higher maturity etc.
    If they can stomach it.
    And if they can how can Portugal/Spain resist, why would Ireland, it can devallue and become 2x competitive for US IT businesses overnight like it was in 90s.
    Then Italy, why should it. And then France how long can it function with 75% tax rates to pay for social services, and try to keep up with the German industrial machine?

  6. does this already include the recent haircut? Has Greece not even started paying back the bailout loans from 2010? Target 2 liabilities are not as bad as everyone thinks, if the Bundesbank wants to avoid losses on those they can just write themselves a check. Interesting times ahead anyway…

  7. How long will it take for every restuarant and hotel to be booked in santorini for the next year? The moment they leave the Euro it’s a bull market in Greece tourism and u can find me and my dollars drinking Ouza making love on a blue rooftop thanking the single currency experiment for letting me live like a king for two weeks. Within 5 minutes after Tyler Durden reports greeces exit … Every hotel will be sold out. Priceline didnt kill William shatner the negotiater the return of the Drachma did. Let the 20 year Greek tourism bull market begin!

  8. I’ll be bullish on Greece too if they exit euro after some weeks of turmoil. But first we want the dracma to stabilize and see how are capital controls going to work (don’t want to be stuck in an illiquid market, don’t want to be JPM on terribly proprietary trading, I mean… hedges), buy cheap assets with cheap dracma.

    You gain from double appreciation in the future of these assets and the underlying currency. The assets will appreciate even if there is not much growth only because inflation! As for real business influence, import companies with exterior credit are going to be massively strong in this post-euro Greece for a while.

    Eurocrats making a trade easier for you since the euro inception, they are worse than any central banker and government out there and that’s a lot to say.

  9. I hope they exit soon…I need to book a holiday.
    The Greece tourism board should push for this tomorrow and then send AMEX/VISA and the “priceLine Negotiator” and e-mail on the vaca packages.