Greek Drama

Europe’s European Central Bank President Trichet spoke out against offering low- interest loans for Greece…The Greek crisis is getting serious. What started as a problem with the fiscal credibility of one euro-zone state has exposed political fault lines running through the currency bloc. Constructive ambiguity, whereby markets were placated with the belief that unspecified help could be provided to Greece, has given way to confusion. With politicians becoming increasingly entrenched on either side of the Greece-Germany divide, the risks are rising that Greece becomes a big problem for the global financial system.

Trichet’s demand for stringent terms and German Chancellor Merkel´s push for sanctions against nations that breach deficit limits heightened the chance that Greece will leave a March 25-26 summit empty-handed. That could force Greece to turn to the IMF.

And from John Maulding´s Outside  the box  :

“Hans-Werner Sinn’s remarks are apparently listened to as closely as are the Federal Reserve Chairman’s remarks in the US. He said:

• The Greek drama will have a ‘frightful’ (‘schreklich’) ending no matter which course of action is taken. The objective is to avoid having a Greek default trigger another banking crisis across the EU.
• The EU member states are too financially fragile to take on any flaky Greek debt. The actual Greek deficit is running at 16% of GDP, not 12% as previously reported. Greece is in a deepening retraction, not a recovery, as previously claimed. [Germany's social security, welfare, unemployment, and health care entitlement programs are all running cash-negative or soon will be, but that is another subject entirely. Angela Merkel has a committee established to work on tax reform, meaning tax rate reductions - Steve].
• There are three bad alternatives. He recommends #3 (effectively, default):
  1. A Franco-German bailout. Dr. Sinn believes this is impractical and the worst of the three alternatives because the amounts required for an effective bailout are so large that it would trigger a jump in yields on French and German sovereign debt which would result in a Euro-wide financial crisis. In addition, Angela Merkel said ‘no,’ and so did Guido Westerwelle (her coalition partner and foreign minister).
  2. IMF loans. Dr. Sinn believes that this would accelerate the Greek economic contraction with a dramatic deflation of wages and prices, which could lead to civil war, revolution and a political destabilization of the area.
  3. Exit the Euro zone, revive the Drachma, re-denominate the sovereign bonds in Drachma, let the Drachma collapse, and rebuild after the collapse, largely on tourist remittances Assuming a small amount of domestic (internal) default, this would be the least-painful to the Greek populace, but German banks and investors would lose approximately $38 Bn in bond investments +/- what can be recovered after the Greek economy recovers. Eventually, Greece would be allowed to re-join the EU.
• Formation of an EU monetary fund is out of the question, he believes, because it requires treaty modifications that might take many years to pass.
• As an aside, he said that if German tax rates are not lowered, that Germany will slide back into recession.”

Difficult decisions ahead for Europe…