German Experts Warn of Greek Default, orderly or not…

The situation is critical. There is immense pressure on Greece to stick to the reforms it has agreed upon with its lenders. The weekend was a horror for the markets  only due to ‘alleged  bankruptcy rumors’ and a nightmare for Greeks due to the new property levy, the sixth in a year. EU-master chief Germany spoke of the possibility of a Greek “orderly default”, other spoke of a eurozone exit and all lenders heralded uni sono, that the 6th bailout tranche may not come to Greece, should reforms will not conclude as soon as possible. There is an immense problem of trust between Greece and its lenders.

 Not to mention the markets’ reactions. The CDS bet on 90% Greece’s bankruptcy and the spreads reached vertigo causing heights, and went climbed over 2,000 b.p. The General Index of Athens Stock Exchange dropped -4.43% and dropped at 847 basic units, reaching the level of 1995!

Bankruptcy (Default) and Euro Exit

Is Greece bankrupting officially? It is about to exit the euro zone? I got quite some e-mails with these questions today. Although I’m not an economy expert here is what I answered more or less:

Default and exit the euro are more or less the same thing. No need to default if it exits the euro. It will have a new currency that will be devalued 40-50% and as the country has almost zero production, basic products will be unbelievable expensive while salaries and bank savings will vanish in the air.

Of course, such a move will have catastrophic effects for the other debt-countries esp Ireland, Portugal to start with. Be sure, if GR defaults or exists the euro,  the markets/speculators will start hitting the other weak EU-members. I don’t believe that EU guys want such a total failure in their own family. Apart from the fact that there is no such a provision mechanism in the euro zone agreements. Not yet, at least.
 
So I believe it is in no EU-common sense interest to have Greece neither default nor exit the EUzone.
 
I just wonder why the Greek state is no unbelievable unable to cut spending and collect taxes from those who systematically do not pay their taxes.

I’ve been trying to find some article to confirm my point of view.

There is one in New York Times with the title Returning Greece to the Drachma. Written in a sober way, promoting the idea. No wonder. Many speculators have bet millions on Greece’s Default. So why shouldn’t they support euro exit and return to Drachma? For speculators there are only CDS and Spreads and national statistics and macroeconomics, but there are not people living in these countries.

While searching for an easy to understand article, the big surprise came from Germany and thus from the populist BILD newspaper, famous and infamous for its anti-Greece  and -Greeks campaigns.

Greece’s Default:  Chaos for all EUrope and the EU-Taxpayers

In an article “BILD explains why a bankruptcy could have devastating consequences for all  Europe”, the newspaper publishes excerpts from interviews with  Jürgen Matthes from “Institute for German Economy” (IW) in Cologne and professor Henning Vöpel from World Economy Institute (HWWI) in HAmburg. 

Would a bankruptcy of Greece solve its problems – or plunge Europe’s economy  into chaos?

Both experts advise against a Greek bankruptcy. Vöpel: “A Greek default wouldn’t do any good or better.”

And Matthes warns:”A bankruptcy of Greece at this point would be most likley much more expensive for Germany and its taxpayers than the continued support of the country.”

Both experts warn that if Greece default, market speculators will hit the rest of the eurozone countries, and that Italy and Spain will be hit be the real crisis as well.

Matthes: “The situation is more precarious than a few months ago because the financial market is already shaking. If Greece should, in the case of a bankruptcy, the Mustangs piled loss of the financial market, it could plunge the economy into chaos. ”

“If after Greece, Italy or Spain would come in turmoil, most banks would get into trouble. Then a credit crunch that could topple the entire European economy in trouble can occur. ”

In plain language: banks would be wary to lend to each other and the economy and when they do it only at much higher interest rates.

Vöpel also sees the danger of a credit crunch: “The economy could slip into a crisis, not only in Greece but throughout Europe.”

The risks posed by a Greek insolvency in the banking sector can not be estimated. There is a lack of transparency.

In plain language: No one knows exactly how many banks in the event of contamination by the Greeks crisis could come into real trouble.

In reference to Roesler’s “orderly default” Vöpel says: “For an orderly default there is a tool missing. Policymakers failed to install it. ”

Orderly bankruptcy means that all creditors would have to be ready, and obliged to accept in the case of a state bankruptcy debt restructuring. In this case would be determined according to a national bankruptcy conference in Greece on a creditor, as would have to pay back the percentage of its debts nor Greece.

That means in any case: Greece’s creditors would get back only a portion of their borrowed money.

In addition, the policy should take precautions to prevent the spread of the debt crisis in other euro countries. Whether this can succeed is unclear.

In addition, Greece’s default would probably drift the country into chaos. Reason: The country could not pay civil servants, most probably could not pay pensions, will cut social spending drastically and probably raise the taxes much higher. A banking crash in Greece would not be excluded.

What can be done?

Matthes: “We need strong reform pressure and patience! A country’s bankruptcy can be very dangerous without a well-thought concept.”

Vöpel “It is illusory to think that Greece comes down from its debt through saving. You must give Greece time, to grow out of the debt, even by temporally stretching the debt, and give Greece time to economically recreate itself.”

Read the Full Article in German HERE