Since first responding, I have tried to catch up on some reading and in the course of doing so have read various weekly letters I either receive or subscribe to, including Mauldin's Thoughts From the Frontline.
In this week's issue Mauldin devotes much time to German contingency planning for a possible default by Greece, which I previously commented on, and a UBS paper examining the process and estimated costs of a country (rich or poor) the leaving the eurozone. The numbers are huge.
Were Greece to leave the zone it's likely it would default on a minimum of 50% of its sovereign debt and possible as much as 75% to 90%. Since we have seen the 50% figure frequently in the context of Greece remaining in the zone, I'm inclined to believe in the higher estimates. Additionally, Greek's GDP could contract by as much 40% to 50% in the first year according to UBS.
It's my guess German financial officials are busily developing alternative economic scenarios and working out likely financial costs for each outcome, understanding that in the long term their interests are best served by preserving all of most of the zone but in the near term decisions must be guided by maximizing the return on finite resources. It's crunch time.
The following is from Mauldin's letter:
Welcome to the Hotel California Such a lovely place Such a lovely face They livin’ it up at the Hotel California What a nice surprise, bring your alibis
Last thing I remember, I was running for the door I had to find the passage back to the place I was before “Relax,” said the night man, “We are programmed to receive. You can check out any time you like, but you can never leave!”
- The Eagles, 1977
You can disagree with the UBS analysis in various particulars, but what it shows is that there is no free lunch. It is not a matter of pain or no pain, but of how much pain and how is it shared. And to make it more difficult, breaking up may cost more than to stay and suffer, for both weak and strong countries. There are no easy choices, no simple answers. Like the Hotel California, you can check in but you can’t leave! There are simply no provisions for doing so, or even for expelling a member. The costs of leaving for Greece would be horrendous. But then so are the costs of staying.
The data I quoted is for the first quarter while what you cite is for the second quarter which is more current and better illustrates the precarious conditions within Greece.
With each day there is mounting concern that Greece will default and Germany is now preparing for that eventuality by preparing a Plan B under which banks would take 50% haircut on Greek debt should Greece not receive additional tranches from the second bailout due to breach of contract and failure to make promised spending cuts, institute labor market reforms and sell public assets.
I have no sympathy for Greece but I do believe the austerity measures are so severe that they will bring about serial economic contractions which will reduce tax receipts, deepen the deficit and lead to fresh calls for further cuts. We can already see this playing out as Greece’s economy is simply as mess. GDP growth is minus 5.5%; debt to GDP is 160%; and the fiscal deficit is in the 8% to 9% range. All of this is leading to further calls for spending cuts and growing doubts whether Greece can be saved with some viewing the country as a black hole in which money is wasted and vaporized.
Greece must either default or leave the eurozone and these are precisely the measures being discussed within the inner circle of policy making. Der Spiegel reports:
German Finance Minister Wolfgang Schäuble, who is reportedly doubtful that the country can be saved from bankruptcy, is preparing for the possibility of Greek insolvency. Officials in his ministry are currently reviewing scenarios for handling such a situation, exploring what it might mean for the rest of the euro zone. Under the first scenario for a Greek bankruptcy, the country would remain in the euro zone. Under the other, Athens would abandon the common currency and reintroduce the drachma.
Volker Bouffier, the governor of the state of Hesse, which is home to Germany's financial capital Frankfurt, is a member of Chancellor Angela Merkel's conservative Christian Democratic Union (CDU) party, as is Schäuble. Bouffier is now urging that the possibility for countries to leave the euro zone be created quickly. Current European Union treaties provide no provisions for a country to abandon the currency.
"If the savings and reform efforts of the Greek government aren't successful, then we need to ask the question of whether we need new rules to make it possible for a euro country to leave the currency union," Bouffier told SPIEGEL.
Greece: The First Of The Dominoes? [View article]
In this week's issue Mauldin devotes much time to German contingency planning for a possible default by Greece, which I previously commented on, and a UBS paper examining the process and estimated costs of a country (rich or poor) the leaving the eurozone. The numbers are huge.
Were Greece to leave the zone it's likely it would default on a minimum of 50% of its sovereign debt and possible as much as 75% to 90%. Since we have seen the 50% figure frequently in the context of Greece remaining in the zone, I'm inclined to believe in the higher estimates. Additionally, Greek's GDP could contract by as much 40% to 50% in the first year according to UBS.
It's my guess German financial officials are busily developing alternative economic scenarios and working out likely financial costs for each outcome, understanding that in the long term their interests are best served by preserving all of most of the zone but in the near term decisions must be guided by maximizing the return on finite resources. It's crunch time.
The following is from Mauldin's letter:
Welcome to the Hotel California
Such a lovely place
Such a lovely face
They livin’ it up at the Hotel California
What a nice surprise, bring your alibis
Last thing I remember, I was running for the door
I had to find the passage back to the place I was before
“Relax,” said the night man, “We are programmed to receive.
You can check out any time you like, but you can never leave!”
- The Eagles, 1977
You can disagree with the UBS analysis in various particulars, but what it shows is that there is no free lunch. It is not a matter of pain or no pain, but of how much pain and how is it shared. And to make it more difficult, breaking up may cost more than to stay and suffer, for both weak and strong countries. There are no easy choices, no simple answers. Like the Hotel California, you can check in but you can’t leave! There are simply no provisions for doing so, or even for expelling a member. The costs of leaving for Greece would be horrendous. But then so are the costs of staying.
Greece: The First Of The Dominoes? [View article]
The data I quoted is for the first quarter while what you cite is for the second quarter which is more current and better illustrates the precarious conditions within Greece.
Greece: The First Of The Dominoes? [View article]
I have no sympathy for Greece but I do believe the austerity measures are so severe that they will bring about serial economic contractions which will reduce tax receipts, deepen the deficit and lead to fresh calls for further cuts. We can already see this playing out as Greece’s economy is simply as mess. GDP growth is minus 5.5%; debt to GDP is 160%; and the fiscal deficit is in the 8% to 9% range. All of this is leading to further calls for spending cuts and growing doubts whether Greece can be saved with some viewing the country as a black hole in which money is wasted and vaporized.
Greece must either default or leave the eurozone and these are precisely the measures being discussed within the inner circle of policy making. Der Spiegel reports:
German Finance Minister Wolfgang Schäuble, who is reportedly doubtful that the country can be saved from bankruptcy, is preparing for the possibility of Greek insolvency. Officials in his ministry are currently reviewing scenarios for handling such a situation, exploring what it might mean for the rest of the euro zone. Under the first scenario for a Greek bankruptcy, the country would remain in the euro zone. Under the other, Athens would abandon the common currency and reintroduce the drachma.
Volker Bouffier, the governor of the state of Hesse, which is home to Germany's financial capital Frankfurt, is a member of Chancellor Angela Merkel's conservative Christian Democratic Union (CDU) party, as is Schäuble. Bouffier is now urging that the possibility for countries to leave the euro zone be created quickly. Current European Union treaties provide no provisions for a country to abandon the currency.
"If the savings and reform efforts of the Greek government aren't successful, then we need to ask the question of whether we need new rules to make it possible for a euro country to leave the currency union," Bouffier told SPIEGEL.