Greece has roughly 500 billion in liabilities give or take a few bills. As soon as they leave the EU they default on that. Why? Because the debt is in Euro's and the thinking is they'll convert that debt to Drachma's but what will the Drachma's be worth in Euro's? The number being thrown around is 40% less. This is a hypothetical number that I think is more wishful thinking than reality. Who's going to except Drachma's that most definitely will be worth less the day after you except them? The Greek central bank will be insolvent the day they leave the Euro as their target2 liabilities would probably double if they don't just default out right on them day one. It'll be three generations before they'll be able to tap the debt markets again because anyone with any memory of this will treat them like the plague. Also there's likely to be a ton of lawsuits. This means the Drachma printing press will be on all the time like the lights in Vegas.
Comparisons to Russian and Argentinian defaults are crazy as hell. Russia had oil, lot's of it. Argentina had soy bean crops and a little oil & gas. What does Greece have that the world would need? Olive oil? What? I'll wait........ Yeah, nothing. So the thought that devaluing would make their exports cheaper and more competitive doesn't apply. You can forget about foreign money chasing bargains in Greece, not after what the contagion would do to the whole world. Even after so called ring fencing the damage would be disastrous at this time. With world economic growth hanging by a thread and so interconnected everybody would have to print a lot more than they've printed so far.
It would cost a lot more than the 500 billion it takes to pay off Greece's debt that's for sure.
It'll take years to ring fence Greece yet they don't have years they have days. The Greek election is June 17th, so what should be done? Printing Euro's should be done. Announced this weekend was a bail out recapitalization of Spanish banks to the tune of 100 billion Euro's. This leaves rescue funds badly depleted at 252 billion Euro's. This is too close for comfort and leaves the door open for the market to speculate on the ability to arrest any future problems. Namely a Grexit. They have to print a cushion.
The EU fiscal union is missing and makes every crisis that much more serious in that it begs the question "Is this it?" Is this the end of the euro? This latest crisis could be just what's needed to fix that. The thing is, they need to fix it before the full brunt of the crisis is felt. That's a big problem because policy makers aren't built to be preemptive. At the same time what would a fiscally unified Europe look like? How would you get there from here without a complete and total disaster? In a perfect world it's easy. It's like the Nike slogan "just do it." But in reality how do you get countries to give up sovereignty? Especially when the countries have thousands of years of history much of which is covered in blood from wars? To say the questions are numerous is an understatement. But if the desire for lasting peace and prosperity that spurred the creation of the EU is still strong it may not be as difficult as it looks.
S&P downgrades and overall market turmoil has opened Germany's eyes to the fact that they will go down with this ship... like it or not.
So the same way we see Spanish bank bailouts we will see a resolution that keeps Greece in the Euro. George Soros aka "The Godfather" made a speech that was on everyone's lips and twitter timeline the week before last where he pointed out what most should have known that policy makers are fallible. So The Greeks could commit economic suicide and actually leave the Euro system but I strongly doubt it. There are forces within Greece who sound suicidal but they can see a glimpse of what it would look like now and I'd bet a dollar to a doughnut that they don't want it.
This week's trade is up judging from the futures market action right now. This will be the case up until the Greek elections. June 17th is on a Saturday so I think we rally until the Friday afternoon then people will get to the sidelines to see what will happen. If the suicidal party wins my bet will be that the suicidal party will look down a decide not to jump. that bet will be small because of the fallibility Mr. Soro's has pointed out.
Until next time good luck and happy hunting traders, and stay low and keep firing!!
P.S. I dedicate this song to Germany, Greece, Spain, and the rest of the EU countries. You've come too far to turn back now.. No white flags above your doors!