Why the Eurozone will have to give in to Greece
- Greece’s Government wants a managed default; not to leave the Eurozone
- The ECB can make it very difficult for Greece to stay in the Euro,
The emperor is naked! There is no mechanism to force an exit and the ECBs supposed powers are irrelevant – see below the likely course of negotiations if they go to the brink and over it.
- Greece refuses to agree to austerity and threatens default.
- EU threatens to force them out of the Eurozone. Bluff called as there is no mechanism to force this on a country
- The ECB refuses to lend to Greek banks hoping that the Greeks will back down. Bluff called.
- ECB refuses to lend and the banks fail
- Immediate bank nationalisation by the Greek Government and a default on all the banks debt.
- This will be followed by immediate default on the Greek debt
- Greece then continues to use Euros within a nationalised banking industry, noting ECB can do
- Impact on Greece? Limited as the country is viable economically
Now, let’s watch what happens. My guess…..large amounts of Greek debt will be written-off – the market prices the debt now at 56% of face value – see here. The interest paid on this debt is now around 10%. Seems like a great deal – buy Greek debt and get 10% per annum and it’s in Euros – brilliant. Don’t do it.
Can the EU change the rules and create a mechanism to force an exit from the Eurozone? Hmmmm…….need to check it out. I suspect such a move would need to be adopted unanimously.