Tags: hans | parisis | greece | eu | euro

Greece Returns to Media Spotlight Amid Wall of Worry

By    |   Monday, 09 May 2011 03:36 PM

Standard & Poor’s has cut Greece from BB-minus to B, which puts it firmly into “non-investment grade” or junk-bond territory, and S&P warns it may cut again.

For the moment, this means Greece is vulnerable to adverse business, financial and economic conditions but currently, still has the capacity to meet financial commitments. How it does that, that’s another question that remains disturbingly unverifiable.

Of course, Greece has immediately reacted and states that the S&P downgrade is “unjustified.” If you ask me, I give more credibility to Standard & Poor’s than to declarations from the Greek government that has a solid, well-established reputation of not telling the truth at all.

So, after all these denials from the Greek government but also from some, not all, EU members on Friday, after the German newspaper Der Spiegel on its web page had revealed the “secret agenda” of a crisis evening meeting in Luxemburg to discuss much more than the likely need to provide Greece with additional aid from 2012 was based on real facts.

By the way Der Spiegel, whose printed edition has more than one million German readers, has a solid reputation of investigative journalism with a specialty of uncovering political misconduct. The Columbia Journalism Review called Der Spiegel the “largest fact-checking operation” that employs about 80 full-time people work in fact-checking and the research/library.

So, the Spiegel Online said on Friday that Greece was considering leaving the euro and reintroducing its old national currency, the Greek drachma it used until it adapted the euro. I would like to stress here it would be wrong to simply ignore the magazine’s detailed claims.

Indeed, much of what was contained in the German finance ministry discussion paper described the possible consequences of a Greek exit.

It’s evident that German Finance Minister Wolfgang Schäuble wanted to prevent Greece from leaving the euro zone if at all possible, is simple common sense. It should not come as a surprise that in that paper the Germans warned leaving the euro-zone “would lead to a considerable “drachma” devaluation by as much as 50 percent and that Greece's national deficit would likely rise to 200 percent of GDP.

And then, yes, as a result of all that a debt restructuring would be inevitable and the currency conversion would lead to capital flight that would mean in turn that Greece might be forced to implement capital controls even if this could not be reconciled with the fundamental freedoms instilled in the European internal market.

The German discussion paper also noted that Greece would also be cut off from capital markets for years to come and the withdrawal of Greece from the euro would seriously damage faith in the functioning of the euro zone itself. Investors would also be forced to consider the possibility that other euro zone members could withdraw in the future, which would mean a full-blown “contagion” situation.

Investors should also take notice that the Greek banking sector in case of returning back to its “old” currency, the drachma, could consume the entire capital base of the Greek banking system and cause an abrupt situation of insolvency of the Greek banks.

If that wasn’t enough, the discussion paper also states that in addition, credit institutions in Germany and elsewhere would be confronted with considerable losses on their outstanding Greek debts and the ECB would be forced to write down a significant portion of its claims as irrecoverable.

If you ask me, if were to happen, a lot of people would lose their sleep… but we aren’t there, yet…

Maybe, in the midst of all this turmoil it’s worth to remember that in December 2009, the ECB published a paper titled “Withdrawal and Expulsion From the EU and EMU: Some Reflections,” wherein author Phoebus Athanassiou argued the unilateral exit of a member state from the euro zone would be fraught with difficulties, while he did not treat it such an event as a complete impossibility.

I think the chances of Greece leaving the euro zone are still very, very slim and in case Greece would like to do it will be immensely hindered by the enormous amount of technicalities that would have to be worked out and agreed on. Is it impossible? Of course not, but it would certainly become a new and extremely complicated chapter in “The current age of the unthinkable!”

So, for now I’ll stay fully “risk off” and try to keep it simple and stay with my dollar, gold and Swiss franc. Of course, that’s my opinion and I could be wrong.

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Standard Poor s has cut Greece from BB-minus to B, which puts it firmly into non-investment grade or junk-bond territory, and S P warns it may cut again. For the moment, this means Greece is vulnerable to adverse business, financial and economic conditions but...
Monday, 09 May 2011 03:36 PM
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