Courtesy of Bruce Krasting
The Der Spiegel article on Friday kicked up a stir. The magazine reported that the possibility of Greece abandoning the peg to the Euro was being seriously considered. Over the weekend we find that there is little truth to the Spiegel claim.
J.C. Juncker (EU finance minister) had this to say:
“We’re not discussing the exit of Greece from the euro area. This is a stupid idea — no way.”
The Greek finance minister, Papaconstantinou chimed in with:
Public debt would double, consumer spending power would be “shattered” and the country would sink into a “war-like recession,”
Okay, so no exit for Greece. Panic over for the time being. The conclusion is that once one joins Club Euro you can’t quit. Ever. Ever? That seems like a long time.
There would be a lot of pain for Greeks if the country decides to step outside the fixed peg of the Euro. Debt would soar in value as the old Drachma is introduced. Social payments that now are denominated in Euros would also cost the state much more. As a result all Euro denominated fixed liabilities by the state or the private sector would have to be restructured. That would entail big losses for many EU banks. It would also crunch the local Greek banks and many of the Greek citizens who hold the bonds.
But hold on a second. Aren’t all those bad things happening already? The holders of Greek debt are looking at TV screens and everyday they are reminded that their assets are trading at 50-60 cents on the dollar. The Greek economy is in the dumpster. It has been for years and it’s not going anywhere as long as this crisis lasts. Greek citizens are seeing round after round of cutbacks, but no progress is being made.
Were it not for the ECB providing short-term support, Greece would have gone belly up a long time ago. The folks in Brussels know that the support necessary to keep Greece afloat will have to be in place for at least another decade. The cost to the big countries in the EU is going to be a non-stop political headache for years to come. There is absolutely no possibility that the Greek economy can grow and prosper given the status quo. So who’s kidding whom when it comes to the pain? Everyone involved is already bleeding pretty badly. How worse could things get?
I think the Greeks should have exited from the Euro a long time ago. They hitched their future to a strong horse and they simply can’t keep it up any longer. I think there is no alternative but for Greece get on with life and move on. To stay stuck in the mud for another ten years is a dumb plan. When individuals, corporations or countries make mistakes they have to ultimately suck up to reality and change direction. Call that a bankruptcy if you like, but that is what is necessary.
Consider the exchange rate implications of where we sit today. In June of 2000 Greece formally adopted the Euro and gave up the Drachma. The official fixing of the rate was at 340.75 GDR per Euro. On the date of this fixing the EURUSD FX rate was .9500. Where are we on that today?
At 1.43 EURUSD the Euro has appreciated by 50% since 2000. The Greek economy is tied to this horse, so the result is that the county is no longer competitive. Its death is assured, but death has been kept at bay by the life sustaining measures of the ECB. It isn’t going to work for much longer. And I think that all the parties at the table are aware of that. Too bad they don’t have the guts to admit to the ‘Euro mistake’ and turn back the calendar.
All the leaders of the world are spouting the language of a market driven economy. But it seems that all these same leaders spend all of their time trying devise ways to thwart the same market forces they claim to uphold. I can’t think of a single Euro ‘decider’ who has not spoken out against the Chinese and their policy of maintaining an artificial level for the CHY. But the same folks ignore that same conclusion when it comes to Greece. Is that hypocrisy or stupidity? I think it is both. What is the future if it is just a perpetuation of the mistakes of the past?
Note:
While looking up some old FX numbers for this piece I happened to check the USDCHF rate for June of 2000. Does USDCHF at 1.64 sound a bit odd? That’s 86% higher. As noted above, the Euro is up only 50%. The difference of 36% is the market’s perception of the Euro’s value as a store of wealth via the CHF. This difference would not be so dramatic were it not for the dead weight on the Euro that the weak peripherals bring.
At some point the weak countries will break the Euro link. It’s a bond that can’t be sustained much longer. The prevailing wisdom is that the process of a Euro breakup is bad for the EURUSD fx rate. The price action late Friday confirmed that (again). I suspect that at some point the psychology will shift. When the weak sisters are jettisoned (for their own good) it will leave a stronger core. The currency for that core has a value much higher than the Euro does today versus the dollar.
When the FX market trades the EURUSD higher on the news headline, “Emergency EU meeting this weekend re: Greece” you will know that the endgame is closer. The way the market knee-jerked traded the EURUSD lower on Friday is just a confirmation that the ‘extend and pretend’ games for the peripherals is still the favored outcome. That’s not likely to last much longer. I doubt the market will wait till the end of the year.
