Euro Zone Crisis - Latest News & Analysis

[Plato]

The debt crisis in Greece has taken on a dramatic new twist. Sources with information about the government's actions have informed SPIEGEL ONLINE that Athens is considering withdrawing from the euro zone. The common currency area's finance ministers and representatives of the European Commission are holding a secret crisis meeting in Luxembourg on Friday night.


Greece's economic problems are massive, with protests against the government being held almost daily. Now Prime Minister George Papandreou apparently feels he has no other option: SPIEGEL ONLINE has obtained information from German government sources knowledgeable of the situation in Athens indicating that Papandreou's government is considering abandoning the euro and reintroducing its own currency.

Alarmed by Athens' intentions, the European Commission has called a crisis meeting in Luxembourg on Friday night. The meeting is taking place at Château de Senningen, a site used by the Luxembourg government for official meetings. In addition to Greece's possible exit from the currency union, a speedy restructuring of the country's debt also features on the agenda. One year after the Greek crisis broke out, the development represents a potentially existential turning point for the European monetary union -- regardless which variant is ultimately decided upon for dealing with Greece's massive troubles.
Given the tense situation, the meeting in Luxembourg has been declared highly confidential, with only the euro-zone finance ministers and senior staff members permitted to attend. Finance Minister Wolfgang Schäuble of Chancellor Angela Merkel's conservative Christian Democratic Union (CDU) and Jörg Asmussen, an influential state secretary in the Finance Ministry, are attending on Germany's behalf.

'Considerable Devaluation'

Sources told SPIEGEL ONLINE that Schäuble intends to seek to prevent Greece from leaving the euro zone if at all possible. He will take with him to the meeting in Luxembourg an internal paper prepared by the experts at his ministry warning of the possible dire consequences if Athens were to drop the euro.

"It would lead to a considerable devaluation of the new (Greek) domestic currency against the euro," the paper states. According to German Finance Ministry estimates, the currency could lose as much as 50 percent of its value, leading to a drastic increase in Greek national debt. Schäuble's staff have calculated that Greece's national deficit would rise to 200 percent of gross domestic product after such a devaluation. "A debt restructuring would be inevitable," his experts warn in the paper. In other words: Greece would go bankrupt.

It remains unclear whether it would even be legally possible for Greece to depart from the euro zone. Legal experts believe it would also be necessary for the country to split from the European Union entirely in order to abandon the common currency. At the same time, it is questionable whether other members of the currency union would actually refuse to accept a unilateral exit from the euro zone by the government in Athens.

What is certain, according to the assessment of the German Finance Ministry, is that the measure would have a disastrous impact on the European economy.

"The currency conversion would lead to capital flight," they write. And Greece might see itself as forced to implement controls on the transfer of capital to stop the flight of funds out of the country. "This could not be reconciled with the fundamental freedoms instilled in the European internal market," the paper states. In addition, the country would also be cut off from capital markets for years to come.

In addition, the withdrawal of a country from the common currency union would "seriously damage faith in the functioning of the euro zone," the document continues. International investors would be forced to consider the possibility that further euro-zone members could withdraw in the future. "That would lead to contagion in the euro zone," the paper continues.

Banks at Risk

Moreover, should Athens turn its back on the common currency zone, it would have serious implications for the already wobbly banking sector, particularly in Greece itself. The change in currency "would consume the entire capital base of the banking system and the country's banks would be abruptly insolvent." Banks outside of Greece would suffer as well. "Credit institutions in Germany and elsewhere would be confronted with considerable losses on their outstanding debts," the paper reads.

The European Central Bank (ECB) would also feel the effects. The Frankfurt-based institution would be forced to "write down a significant portion of its claims as irrecoverable." In addition to its exposure to the banks, the ECB also owns large amounts of Greek state bonds, which it has purchased in recent months. Officials at the Finance Ministry estimate the total to be worth at least €40 billion ($58 billion) "Given its 27 percent share of ECB capital, Germany would bear the majority of the losses," the paper reads.
In short, a Greek withdrawal from the euro zone and an ensuing national default would be expensive for euro-zone countries and their taxpayers. Together with the International Monetary Fund, the EU member states have already pledged €110 billion ($159.5 billion) in aid to Athens -- half of which has already been paid out.

"Should the country become insolvent," the paper reads, "euro-zone countries would have to renounce a portion of their claims."

ARTICLE...

[Plato]

Article from the NY Times

http://www.nytimes.com/2011/05/06/business/06norris.html?_r=1

[Fintan]

It's a balancing act.
It's extend and pretend.

From that NYT article:

[Fintan]

[Plato]

Greece’s default will be only the beginning…then we’ll have Ireland, Portugal and Spain follow suit;
haircuts of 50-60 % on their outstanding debt will be inevitable (if not more), these countries will have to leave the euro and have to reintroduce their own currencies, we’ll see the peoples of these countries standing in line to withdraw their money, only to be told that they can’t;” sorry , ‘bank holiday’”. Haven’t we heard this before? Sure, only as recent as 2002 in Argentina;

http://www.nytimes.com/2002/04/20/business/argentina-orders-indefinite-bank-holiday.html

The people of Argentina were duped as the Argentine gov’t and banking system could no longer keep up the peg of the Argentine peso to the US dollar. Ah, but surely this is Europe, things can’t go wrong like that over here?
Consider this; Greece, Portugal and Spain were all under some form of dictatorship until the mid 70’s, with weak economies heavily dependent on tourism and agricultural produce. Their membership of the EU seemed to promise a new, bright future; billions of euros were pumped into their economies to improve their infrastructure etc. Especially since the introduction of the Euro and these countries joining, all brakes were off, as interest rates were low and credit was ample. Greece spent it on early retirement and pensions, Portugal, Ireland and Spain on property bubbles. Ireland surely is an exception, but was completely sucked dry by the British over centuries, it’s economy only started to boom in earnest in the 90’s. Hey, I can understand they wanted a piece of the action too!
Anyway, these economies are in bad shape and all these so-called “austerity measures” will only drive them off the cliff. Personally I think that the banks and investors responsible for lending them all that money should be punished for their stupidity. This is the last thing they want, and that’s why their agents, the politicians, keep postponing the inevitable. But here’s the catch, German and French banks getting into trouble for their irresponsible lending behavior will turn to their governments and cry foul, because they are not getting their money back. The only thing the politicians can think of, is to foot the sheeple with the bill, the tax payers, which has caused e.g. so many problems for the Irish. But in some countries like Germany and Finland (True Fins!), the people are not taking it anymore, and rightly so!

How to fix all this?
1] Money as a means of exchange, a supposed store of value and unit of account is too pivotal for any economy to be handled by private institutions; banks and any money creating institution should be firmly placed in the hands of the people, like it says in the US constitution;
"Congress shall have the power to coin money and regulate the value thereof."
Great presidents like Jefferson understood how private dangerous banks were;
"If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered...I believe that banking institutions are more dangerous to our liberties than standing armies... The issuing power should be taken from the banks and restored to the people, to whom it properly belongs."
2] Abolition of usury (or interest, as it is euphemistically called) for private individuals; the payment of usury used to be considered a sin for good reason
3] Massive debt relief worldwide; the whole system has to be rebooted by giving people a fair financial chance again; this means that ultimately some very rich people will pay the price ( I, for one, surely don’t feel sorry for them, they are the same ones that own our banks).
If we implement these changes, and kick out the current politicians, which only represent special (moneyed) interests, and choose people that will actually represent the people, we might be heading in the right direction.
In the meantime, buy physical silver and gold, because it does not look like these fiat currencies will last. But I can’t eat gold? You can’t eat paper either, especially the digital kind. The advantage of gold is that there is no “IOU” written on it. It has been around since the dawn of history, and will be for a long time to come...

[Fintan]

[Plato]

So this Varoufakis guy claims that the article in Der Spiegel was about focusing the minds of the politicians on finally admitting that Greece has to restructure its debts. Yes, of course, but that’s only part of the story, because even with its debts restructured, Greece is not competitive as long as it is a Euro member. Basically, Greece’s economy is toast and will still be toast after a debt restructuring. Greece should never have been admitted to the Euro project to begin with, as everybody that had any knowledge with regard to the introduction of the euro already knew. Greece cooked the books to get in, and now will have to pay the price (and after that Portugal, Ireland and Spain).

The euro is a political pipe dream, wanting to compete with that other faltering world reserve currency, the US dollar. The fact that it has done better than the dollar since its introduction is not a sign of strength, but only shows what a total joke the US dollar has become.

Anyway, all of this is just a prelude to bigger things to come, if we don’t wake up. The plans of the NWO are to continue to create financial chaos and then at just the right time, when the situation seems to get out of control, to offer their wonderful solution, a global currency (which already exists in the form of SDR’s, Special Drawing Rights), so this will never happen again. This way, we will continue to be enslaved to their create money out of thin air Scheme, may be this time backed by gold. If you want to read the entire story on how we got here;

http://canadafreepress.com/index.php/article/9454

I guess Varoufakis never read that article.

[Plato]

Finally somebody that is talking some sense...
(Morgan Kelly)


http://www.irishtimes.com/newspaper/opinion/2011/0507/1224296372123.html

[Big Boss]

[Plato]

In answer to your question; this would only be the case if Greece decides to exit the euro and reintroduce the drachmae, but still wants to pay all its debt (in euro); that would be really stupid. The drachmae would instantly devalue by some 30-50%, whereby as a result Greece's debt would increase by that percentage in drachmae, to a completely unmanageable 200% of GDP. Greece should never exit the euro without giving its creditors at least a serious 50-60% haircut. By the way, Greece already has its fair share of protests and riots right now, this will only increase as long as the current situation is not mended. They're truly stuck between a rock and a hard place...

[Fintan]

[Plato]

Like I said, if we don't wake up, the NWO will continue to implement its agenda. Forums like this are the perfect way to inform people of other, better options. This doen not mean that the NWO (which is just another front for the power elite behind it all, like the Rothschilds) has been completely blown out of the water yet. They are still in charge of the Fed, BIS etc, and continue to own the large banks, insurance companies, media conglomerates, pharmaceutical companes etc. I agree that fear mongering is not the rigtht approach, but neither is complacency....The alternative media will continue to play an important role in exposing the truth, which is sometimes ugly indeed.
Thanks for giving us a chance to do so, Fintan!

[Plato]

From the Fin. times

The muddle-through approach to the eurozone crisis has failed to resolve the fundamental problems of economic and competitiveness divergence within the union. If this continues the euro will move towards disorderly debt workouts, and eventually a break-up of the monetary union itself, as some of the weaker members crash out.

The Economic and Monetary Union never fully satisfied the conditions for an optimal currency area. Instead its leaders hoped that their lack of monetary, fiscal and exchange rate policies would in turn see an acceleration of structural reforms. These, it was hoped, would see productivity and growth rates converge.

The reality turned out to be different. Paradoxically the halo effect of early interest rate convergence allowed a greater divergence in fiscal policies. A reckless lack of discipline in countries such as Greece and Portugal was matched only by the build-up of asset bubbles in others like Spain and Ireland. Structural reforms were delayed, while wage growth relative to productivity growth diverged. The result was a loss of competitiveness on the periphery.

All successful monetary unions have eventually been associated with a political and fiscal union. But European moves toward political union have stalled, while moves towards fiscal union would require significant federal central revenues, and also the widespread issuance of euro bonds — where the taxes of German (and other core) taxpayers are not backstopping only their country’s debt but also the debt of the members of the periphery. Core taxpayers are unlikely to accept this.

Eurozone debt reduction or “reprofiling” will help to resolve the issue of excessive debt in some insolvent economies. But it will do nothing to restore economic convergence, which requires the restoration of competitiveness convergence. Without this the periphery will simply stagnate.

Here the options are limited. The euro could fall sharply in value towards – say – parity with the US dollar, to restore competitiveness to the periphery; but a sharp fall of the euro is unlikely given the trade strength of Germany and the hawkish policies of the European Central Bank.

The German route — reforms to increase productivity growth and keep a lid on wage growth — will not work either. In the short run such reforms actually tend to reduce growth and it took more than a decade for Germany to restore its competitiveness, a horizon that is way too long for periphery economies that need growth soon.

Deflation is a third option, but this is also associated with persistent recession. Argentina tried this route, but after three years of an ever deepening slump it gave up, and decided to default and exit its currency board peg. Even if deflation was achieved, the balance sheet effect would increase the real burden of private and public debts. All the talk by the ECB and the European Union of an internal depreciation is thus faulty, while the necessary fiscal austerity still has – in the short run – a negative effect on growth.

So given these three options are unlikely, there is really only one other way to restore competitiveness and growth on the periphery: leave the euro, go back to national currencies and achieve a massive nominal and real depreciation. After all, in all those emerging market financial crises that restored growth a move to flexible exchange rates was necessary and unavoidable on top of official liquidity, austerity and reform and, in some cases, debt restructuring and reduction.

Of course today the idea of leaving the euro is treated as inconceivable, even in Athens and Lisbon. Exit would impose big trade losses on the rest of the eurozone, via major real depreciation and capital losses on the creditor core, in much the same way as Argentina’s “pesification” of its dollar debt did during its last crisis.

Yet scenarios that are treated as inconceivable today may not be so far-fetched five years from now, especially if some of the periphery economies stagnate. The eurozone was glued together by the convergence of low real interest rates sustaining growth, the hope that reforms could maintain convergence; and the prospect of eventual fiscal and political union. But now convergence is gone, reform is stalled, while fiscal and political union is a distant dream.

Debt restructuring will happen. The question is when (sooner or later) and how (orderly or disorderly). But even debt reduction will not be sufficient to restore competitiveness and growth. Yet if this cannot be achieved, the option of exiting the monetary union will become dominant: the benefits of staying in will be lower than the benefits of exiting, however bumpy or disorderly that exit may end up being.

Nouriel Roubini is chairman of Roubini Global Economics, professor of economics at the Stern School of Business NYU and co-author of ‘Crisis Economics’ that has been recently published in its paperback edition.

[Fintan]

[Fintan]