Everything You Always Wanted to Know About Greece Leaving the Euro (But Were Afraid to Ask)
- Posted on June 15, 2012 at 4:54pm by
Becket Adams
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NEW YORK (The Blaze/AP) – As the Greek elections draw closer, bankers, governments, and investors are preparing for the possibility of the ailing country dropping the euro as its currency, a move that could spread turmoil throughout the global financial system.
The worst-case scenario envisions governments defaulting on their debts, a run on
European banks and a worldwide credit crunch reminiscent
of the financial crisis in the fall of 2008.
A Greek election on Sunday will go a long way toward determining whether it happens. Syriza, a party opposed to the restrictions placed on Greece in exchange for a bailout from European neighbors, could do well.
In the meantime, banks and investors have sketched out the ripple effects if Greece were to leave the euro.
They think the path of a full-blown crisis would start in Greece, quickly move to the rest of Europe, and then hit the U.S. Stocks and oil would plunge, the euro would sink against the U.S. dollar, and big banks would uncover losses on complex trades.
Here’s how things could play out:
ACT I:
What would Greece’s exit look like? In the worst-case scenario, it starts off messy.
The government resurrects the Greek currency, the drachma, and says each drachma equals one euro. However, currency markets would treat it differently. Banks’ foreign-exchange experts expect the drachma would plunge to half the value of the euro soon after its debut.
For Greeks, that would likely mean surging inflation — 35 percent in the first year, according to some estimates. The country is a net importer, and would have to pay more for oil, medical equipment, and anything else coming from abroad.
The Greek central bank would also need to print more drachmas once the country got locked out of lending markets, says Athanasios Vamvakidis, foreign exchange strategist at Bank of America-Merrill Lynch in London.
Greece’s government and banks currently survive on international aid. “Without access to markets, they have to print money,” he says.
That’s one reason analysts say the switch to a drachma would lead the country to default on its government debt, possibly triggering losses for the European Central Bank, and other international lenders.
Most assume foreign banks would have to write off loans to Greek businesses, too. Why would Greeks pay off foreign debts that effectively double when the drachma drops by half?
Say a small shop owner in Athens has a €50,000 business loan from a French bank. She also has €50,000 in savings in a Greek bank. The Greek government turns her savings into 50,000 drachma.
Protesters pass by a burning cinema in Athens, Sunday, Feb. 12, 2012. Riots engulfed central Athens…as lawmakers prepared for a vote on austerity measures demanded to keep the country solvent and within the eurozone. (AP Photo/Kostas Tsironis)
If the new currency fell by 50 percent to the euro as expected, her savings would suddenly be worth €25,000. But she would still owe €50,000 to the French bank.
European banks would take a direct blow. They’ve managed to shed much of their Greek debt but still held $65 billion, mainly in loans to Greek corporations, at the end of last year, according to an analysis by Nomura, a financial services company. French banks have the most to lose.
ACT II:
Here’s where things get scary.
The European Central Bank and European Union would have to persuade bond investors that they will keep Portugal, Spain, and Italy from following Greece out the door. Otherwise borrowing costs for those countries would shoot higher.
“If they fail to reassure bond investors, all of the nightmare scenarios come into play,” says Robert Shapiro, a former U.S. undersecretary of commerce in the Clinton administration.
Analysts agree that the so-called firewall built to stop the crisis from spreading needs more firepower.
Much of the €248 billion ($310 billion) left in the European Financial Stability Facility, one European bailout fund, was pledged by the same countries that may wind up needing it, Vamvakidis says.
There‘s also a European Stability Mechanism that’s supposed to be up and running next month, but Germany has yet to sign off on it.
A fast-spreading crisis is known in financial circles as contagion — a term borrowed from medicine and familiar to anyone who has watched a disaster movie about killer viruses on the loose.
“It’s like a disease that spreads on contact,” says Mark Blythe, professor of international political economy at Brown University.
The bond market, where banks, traders and governments cross paths, provides the setting. If Greece dropped the euro, traders would become more suspicious of Spain, Portugal and Italy and sell those countries’ government bonds, pushing their prices down and
driving their interest rates up.
Higher borrowing costs squeeze those countries’ budgets and push them deeper into recession. Plunging bond prices imperil Europe’s already troubled banks, which stockpiled government bonds when they were considered safe.
At this point, the risk would be high for a run on banks throughout Europe. People would stampede to their banks to withdraw what they can. Analysts and investors say that’s the biggest fear.
People in Spain, for example, have already seen what’s happened in Greece and have started pulling euros out of their accounts in fear the country will switch back to cheaper pesetas.
“People see their banks in trouble,” Shapiro says.
In less frantic times, the government would come to the rescue with cash or take over the banks. European countries have already committed to lend up to $125 billion to Spain’s banks to help save them.
But all this is happening in the middle of a government debt crisis, and if the crisis gets worse, the Spanish or Italian governments couldn’t borrow enough cash from investors to save the day.
“They can’t afford to guarantee deposits or money market balances,” Shapiro says. “They don’t have the ability to borrow internationally from bond markets. Where are they going to get the funds?”
From here, the crisis could easily snowball: Banks could fail, the surviving banks could stop lending to each other, and a credit freeze could shut down Europe as assuredly as a blizzard did last winter.
One way to stem the contagion would be French President François Hollande’s so-called eurobonds (bonds backed by all 17 euro countries). They could be sold to raise money for troubled European governments.
Germany, which has the strongest economy of the euro countries, has fought the eurobond suggestion. However, German Chancellor Angela Merkel said that she might consider Hollande’s idea if eurozone leaders agree to certain proposals.
Angela Merkel and François Hollande in Brussels
with Austrian Chancellor Werner Faymann
The International Monetary Fund would probably pitch in. Peter Tchir, who runs TF Market Advisors, worries that the IMF may take a loss on the roughly $28 billion it has already loaned to Greece.
Cash-strapped European governments should be able to turn to the IMF for help, but the IMF’s money comes from its 188 member countries. Tchir says that the U.S. and other countries may balk if the IMF asks for help supporting Europe.
“People are happy to put money in if they think they won’t lose it,” Tchir says. “In this case, the IMF loses money, then everybody gets scared.”
ACT III:
A full-blown crisis would cross the Atlantic through the dense web of contracts, loans, and other financial transactions that tie European banks to those in the U.S., experts say.
Blythe, the professor at Brown, believes credit default swaps, the complex financial instruments made infamous by the 2008 financial crisis, would provide the path.
The swaps were created as a sort of insurance for loans. After lending money to a business or government, investors take out insurance on the loan. If the borrower runs into trouble and can’t pay – say, the government of Spain defaults – the banks that sold the insurance cover the loss.
A $2 billion trading loss that JPMorgan Chase revealed in May, traced to a hedge against the Europe crisis, shows just how easy it is for even the safest and savviest of banks to slip up.
And it doesn’t even take a default for a credit default swap to go bad.
If traders think other countries will follow Greece, they’ll drive up borrowing rates by selling government bonds, which also pushes up the cost of insuring their debt. That’s similar to how your neighborhood insurance agent handles a teenage driver.
In the derivatives market, where credit default swaps are traded, there’s a twist. When markets treat Spain like a bad credit risk, those who took out insurance on Spanish debt to protect against a default can force the banks that sold the insurance to prove they can make good on the claim.
To do that, banks cash out something else — U.S. government debt, gold, or anything easy to sell. In normal times, it’s no big deal. In a crisis, it can lead to a cascade of selling, spreading trouble from one market to another.
Another problem: It’s not clear how much U.S. banks have at risk to Europe through credit default swaps, because regulations let banks keep that information a secret.
“You could have American banks up to their necks in CDS liabilities,” Blythe says. “We don’t even know.”
There’s a wide variety of other paths the turmoil could take into the U.S.
Money market mutual funds, which hold more than $2.5 trillion, have an estimated 15 percent of their investments in Europe. European banks are also large buyers of U.S. mortgage bonds. If they’re forced to sell them, mortgage rates could jump, imperiling the U.S. housing market. Frightened banks might also pull the credit lines companies depend on for global trade.
So, what’s the good news? Many analysts don’t think the crisis will get that far. But that’s about it.
Just in case the worst comes to pass, analysts at Barclay’s have attempted to estimate the fallout. They compare it to the days after the investment bank Lehman Brothers collapsed in September 2008. This time, they project that oil prices would fall to $50, stock markets outside of Europe would plunge 30 percent, and the dollar would soar to trade nearly even with the euro.
Blythe is skeptical that it will get this bad, because he hopes the previous financial crisis has left governments and central banks prepared.
However the Greek story ends, Blythe believes it’s bound to be ugly. Putting 17 countries together to share a common currency worked well when Europe prospered. Now that they’re struggling, “all the design flaws are becoming apparent,” he says. Every solution that’s supposed to fix a problem creates another problem.
The proposed $125 billion loan to save Spanish banks, for instance, adds to the debt burden of Spain and other troubled European countries, which sent their borrowing costs higher and put a tighter squeeze on their budgets.
“The euro itself,” Blythe says, “is a bloody doomsday machine.”
The Associated Press contributed to this report. Front page photo source: Bloomberg File Photo/Tim Boyle
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MRMANN
Posted on June 16, 2012 at 9:42amThis is an excellent article, but forgive me, by the time I got to Act III, I was glazed over. That said, though, the EuroZone does seem like a gigantic House of Cards, with the US not far behind.
Report Post »william 123
Posted on June 16, 2012 at 8:53amI hate to be a doomsayer, negative Nancy or whatever you want to call it…bottom line: a WAR is coming. History repeats itself, what caused WWII? Debt. Germany’s war retributions. What is the only thing that can pull a country out of debt? Conquest. Printing more money doesn’t work (Zimbabwe), obviously borrowing more money doesn’t work and at this point all of the countries on the planet are economically tied together. Soon it will be the “have not” versus the “haves” and that is when things get bad. Believe in God as this was foretold a long time ago…..
Report Post »DAYWATCHER
Posted on June 16, 2012 at 2:32pmI completely agree with you. So, if I remember correctly, about one quarter of the earth’s population is set to die in the coming war and then a great cry for “Peace”. And most of us know who is set to make an evil appearance at that point.
I’m just saying….
Report Post »cliffattheblaze
Posted on June 16, 2012 at 1:34amI keep telling anyone who will listen. Prepare. Buy enough food to last your family a good while, like a year while it’s still relatively cheap. Have enough cash on hand to last a month. Get some junk silver while it’s still relatively cheap for barter. Get some stuff to weather some storms like power failures and water shortages. Finally, and I mean finally, get a gun and some ammo. Bear in mind that if you’ve never owned or trained on a gun, IT’S EXPENSIVE. So, get the other stuff first. You have to pay for the gun, the ammo, the range to shoot at, the safe to keep it in, training for anyone who hasn’t been trained, including your kids. You don’t want them shooting each other or their friends.
While you are getting that stuff done, don’t forget about a getaway plan if you live in a city. Always keep 1/2 tank of gas in your car in case you need to bail quickly. Things can come apart at the seams very quickly. The main preparation is mental and spiritual. Don‘t end up unable to decide what to do because you hadn’t thought through what could happen. Plan a couple of places you can stay at if needed.
By the way, almost nobody listens, so I expect things to get pretty bad. There will be an awful lot of people who will be hungry, broke, homeless, etc.
Report Post »historyguy48
Posted on June 16, 2012 at 7:07amIf they aren’t prepared by now, they won’t. There is an E-book out there you might enjoy, its actually a scary look at what may happen. The title is “Death of Civilization; The Apocalypse Begins” by Nathan Hale.
Report Post »You forgot that you must be part of a group, individual survival is very iffy without a group because no body can be awake 24/7 and the bad guys will work in a group. Good luck!
WatchingAmericaDie
Posted on June 16, 2012 at 12:57amWhile Europe is now seeing just how disastrous its socialist agenda really is, Obama and the Dems are hard at work trying make the US just like Europe. Our country‘s credit rating took a hit and it’s bound to take another one because of the massive debt and deficits we have. If Obama were a corporate CEO, he would have been fired a long time ago. For America’s sake, let‘s hope the bonehead doesn’t get four more years to do even more damage. This nation‘s balance sheet doesn’t look good and it will quickly get worse unless something drastic happens soon.
Report Post »german_viewer
Posted on June 16, 2012 at 12:50amGreece leaving the Euro zone would be the best thing that could happen. I‘m a German and I’m so tired of getting my money sucked away by taxes that than goes to Greece. Germany leaving the Euro would be even better. But I have no hope that this will ever happen. It’s so sad.
The Greek have lived for decades by printing money or rather by adding more and more debt. Now is payback time. There are many people in Greece who just don’t know how to get enough food to survive, mothers who have to give their children away because they just can’t feed them anymore, people who can‘t get any medical help because they don’t have enough money to pay the doctors.
This is how it looks like when our children pay for our debt. This will come to other European countries and the U.S. as well. Every dollar that we spend today and that is added to our debt will have to be paid back by our children. We are selling the future of our children!
Look to Greece and see what it will mean for our children!
Report Post »Altair
Posted on June 16, 2012 at 8:33amAch, du lieber, mein freund !
In America , it’s “I’m so tired of getting my money sucked away by taxes that than goes to welfare parasites in this country.”
Your following paragraphs exactly parallel what’s going on in America as it becomes flooded with high birthrate “minorities” who will riot if they aren’t totally supported by the government, with our tax money.
Report Post »aztireman
Posted on June 15, 2012 at 10:23pmBring it on!!! Time to hit the reset button on this whole mo fo. Hope you zombies are ready to get it on. The time is almost here for the few proud patriots this country has left to stand up and take back our country from the flesh eating liberal zombies that are destroying it. Real people don’t have to worry, if you were raised right and fear God then you will inherit the earth. We will all be far better off than some idiot who took ethnic studies and lesbian economics classes. These loosers will be wholy unprepared.
RED NECKS and people who can provide for themselves will be the next ruling class!
TRUE KNOWLEDGE and SKILLS = TRUE WEALTH and you can’t print more of that!
Report Post »Magyar
Posted on June 15, 2012 at 10:32pmI‘m with you and I know lots more who’ll stand against the Dictator!
Report Post »Altair
Posted on June 16, 2012 at 8:34am“A country boy WILL survive!”
Report Post »JUSTANOTHEROPINION
Posted on June 15, 2012 at 9:00pmWhat is everybody so worried about here in America? Obama has your back. I’m sure he will keep us F.E.D. and nurished. Wow, with a statement like this I could probably get a job at MSNBC (if I don’t choke first).
Report Post »Couyon64
Posted on June 15, 2012 at 8:32pmI’ve always heard the greeks like it in the booty. That‘s where they’re about to give it to the rest of us.
Report Post »lukerw
Posted on June 15, 2012 at 11:03pmUtopia is an interesting read… given to the Socialists & Dreamers… by the Ancient Greeks. And, now, in full circle, it has come home to Roost and Bite them in the A$$!
Report Post »Altair
Posted on June 16, 2012 at 8:36amWell, you know how they separate the men from the boys in Greece !
(With a crowbar !)
Report Post »Taxpaying Contributor
Posted on June 15, 2012 at 8:31pmI struggle to explain this to my 5 year old niece.
some people make money loaning their money to others.
some people make money loaning it to those lenders.
some people make money borrowing money from others.
some people make money borrowing from those borrowers.
some people…
They promised to take care of us. And we believed them.
Let’s go have another strawberry from our backyard garden.
Report Post »kindling
Posted on June 15, 2012 at 10:10pmI have another version. When you feed the wild animals they become dependant, grow fat, and have more offspring than they would have had they eaten as wild animals. All the free food brings in animals from other areas and you start to get diseases that were not there before. The people that are feeding the animals realize they have total control of the animals and start using them to get rich themselves. Fortunately, some of the animals realize how unhealthy it is to live like rats in a New York subway and begin foraging in the forest again. The powerful people don’t like that and make the forest illegal to go into. Then the animals form the animal Tea party.
Report Post »lukerw
Posted on June 15, 2012 at 8:04pmSeems like a futuristic version of a World War in Europe… but they fighting each other with Debt, rather than Bullets!
Report Post »Meyvn
Posted on June 15, 2012 at 7:50pmI don’t give a rats ass about Greece at the moment. We have our own treasonous issues we need to immediately address right here at home.
Report Post »DGuy
Posted on June 15, 2012 at 7:42pmSo long as I can still buy lobster with my foodstamps everything will be cool…
Report Post »lukerw
Posted on June 15, 2012 at 8:09pmThe major contributor to the IMF is the US; Good Luck with that!
Report Post »BobtheMoron
Posted on June 15, 2012 at 6:46pmPredicted this in Sept 2009. Been prepping ever since.. Don’t know how bad it is going to get but I am still stocking up on food and other necessities. Might be 3 months or take 3 years for the system to reboot if it ever does reboot. Prepare to live in a different world if this collapses happens. It seems inevitable but somebody might pull a rabbit from the hat at the last moment.
Report Post »chazmo
Posted on June 15, 2012 at 7:28pmAt this point the only thing that possibly could put this off longer, other than more QE, is war.. Other than that there is no more Rabbits left.
Report Post »Chris.underhill
Posted on June 15, 2012 at 6:24pmHey have any of you seen this ?
http://www.youtube.com/watch?v=E8vmaj75xzE&feature=related
Learn to SWIM good luck this is an old song nothing new here just a bunch of Dults to set in there own world to even help an old lady with the door,help load there groceries, help an old man pick up his change he doped.
Report Post »The words from the Chronicles of riddick … IT all had to end sometime..
flyingeagle
Posted on June 15, 2012 at 6:20pmabcd
Report Post »unrealistic
Posted on June 15, 2012 at 9:13pmYou apparently graduated from school a while ago. I don’t think kids can get that far in the current system.
Report Post »Mr Sanders
Posted on June 15, 2012 at 5:41pmM.A.D. to M.A.E.D. – well social planners and practitioners; nice job. Debt upon debt upon debt upon debt…..
this heart arithmia may be enough to finally take down this economic patient.
Run to red box, enter code, break glass, prepare….. plunge the Red button…. and may God grant US strength and wisdom.
Report Post »Dave.the.Blaze
Posted on June 15, 2012 at 5:34pmThe euro was a bad, bad idea to begin with. It’s fine when times are flush but it makes it extremely tough to respond to crises like this. England is probably sitting back with a big, smug smile on its face right about now!
Report Post »socialism.rocks
Posted on June 15, 2012 at 6:17pmengland owns all the euro debt it bought it up…
Report Post »sorry not to big banks are going to fail miseribley–
jpmorganbankofamericagoldmansachs own trillions of euro debt- and ten times that in otcs..
otcs is the deathbead of capitalism… its in the hundreds of trillions those will become worthless when people figure out they are a ponzi scheme…
no federal reserve is big enough to save what is coming….
Mutiny
Posted on June 15, 2012 at 5:29pmAct 4
Looting, rioting, murders, rapes, leading to civil war around the world.
Report Post »jakartaman
Posted on June 15, 2012 at 5:49pmMutiny,
That may come if Obama is re-elected! Ha
This country is morally/spiritually and financially bankrupt – So that can’t lead to good things!
Report Post »Euro collapse – Iran war – possibly Syria – “So ya don’t believe we are on the eve of Destruction”
Mutiny
Posted on June 15, 2012 at 6:08pmLOL you think Obamalite is going to stop it? You do realize Romney’s budget doesnt cut current spending levels right? Without cuts in spending we will face bankruptcy is as simple as that.
Report Post »jakartaman
Posted on June 15, 2012 at 5:26pmsimply put – There is not enough money to cover the debt.
Report Post »Moving the deck chairs on the titanic is just postponing and worsening the end result.
Anyone with flat stuff, bonds, stocks dollars may want to trade them for something real.
I would also suggest you move your accounts out of the big banks into your local credit unions.
listeninginVT
Posted on June 15, 2012 at 5:20pmI love the comment ‘Blythe is skeptical that it will get this bad,’….seriously?????? Like 2008 wouldn’t happen, like we are out of the recession, like the private sector is ‘fine’……. oh, look, a unicorn !…….
Report Post »theblazerunner
Posted on June 15, 2012 at 5:51pmThumb Wars – Death Of Obi
Report Post »touchdown!!!
http://www.youtube.com/watch?feature=player_detailpage&v=hR7Th9VY9o4#t=50s
Snowleopard {gallery of cat folks}
Posted on June 15, 2012 at 5:10pmThe end game is at hand.
Report Post »Mikev5
Posted on June 15, 2012 at 5:03pm10 9 8 7 6 5 4 3 2 1 the count down has started all hell is going to happen if you dont think so you are a fool
Report Post »DAYWATCHER
Posted on June 16, 2012 at 2:37pmI completely agree with you. So, if I remember correctly, about one quarter of the earth’s population is set to die in the coming war and then a great cry for “Peace”. And most of us know who is set to make an evil appearance at that point.
Report Post »I’m just saying….