According to the markets Greece is gone:
Credit-default swaps on Greek government debt surged to a record, signaling a 91 percent chance the nation will fail to meet debt commitments, after its economy shrank more than previously reported.
Five-year contracts on the country’s sovereign bonds jumped 196 basis points to 3,001 basis points, at 3:45 p.m. in London, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.
Gross domestic product shrank 7.3 percent from a year earlier after declining 8.1 percent on an annual basis in the first quarter, the Hellenic Statistical Authority said. Greece’s financial situation is “on a knife’s edge,” German Finance Minister Wolfgang Schaeuble told lawmakers last night, according to parliament’s HIB bulletin.
“It’s a combination of Greece continuing to disappoint and probably a growing realization among politicians that they’re throwing good money after bad,” said Gary Jenkins, head of fixed income at Evolution Securities Ltd. in London. “They’ve finally woken up to the fact that they’re not going to get this money back.”
Is this a surprise? I have been saying those exact words since May 2010. Greece’s position certainly isn’t being helped by the Euro-Elite who are now publicly muttering about a Greek exit, a subject that has been taboo up until very recently:
Senior EU officials are speaking privately about a dangerous new phase in the two-year-old euro zone crisis. Greece – the spark for the conflagration – is close to intractable and Italy, the region’s third largest economy and biggest bond market, is cause of grave concern.
Dutch Prime Minister Mark Rutte provided perhaps the clearest indication yet that Greece’s 10-year euro membership might not be forever, outlining on Wednesday a plan under which a member state could leave the currency bloc if it consistently and repeatedly ignored budget deficit and other obligations.
“Countries which are not prepared to be placed under administratorship can choose to use the possibility to leave the euro zone,” he and his finance and economics ministers wrote in a proposal sent to the Dutch parliament, although it did not mention Greece or any other member state by name.
In whispers, some officials are giving a stark assessment, even if they do not yet represent the mainstream of EU thinking, where many still talk about a solution being found.
The German finance minister also made the point very clear yesterday while addressing his parliament:
“Ladies and gentlemen, the situation is serious in Greece,” German finance minister Wolfgang Schaeuble , who has been at the heart of trying to resolve the crisis for the past two years, stated simply as he began a speech to Germany’s Bundestag on Thursday.
“At the moment the troika (EU/IMF/ECB) mission is suspended. There can be no illusions here. As long as this mission cannot confirm that Greece has fulfilled the conditions, then the next aid tranche cannot be paid. There is no wiggle room here.”
The fact that the ECB’s president is cracking under the pressure certainly isn’t helping either:
Not withstanding the legal complexities of an exit it would seem to me that the European public is now being “soften-up” for such and event. Which leads me to once again muse on what happens next. I have previously considered a plan for a European exit, but that was a discussion of a controlled event, I doubt very much whether those will be the actual circumstances in which this would occur.
So what happens if Greece does exit and the outcome is an all out disaster for the country. According to UBS the result would be catastrophic:
The cost of a weak country leaving the Euro is significant. Consequences include sovereign default, corporate default, collapse of the banking system and collapse of international trade. There is little prospect of devaluation offering much assistance.We estimate that a weak Euro country leaving the Euro would incur a cost of around EUR9,500 to EUR11,500 per person in the exiting country during the first year. That cost would then probably amount to EUR3,000 to EUR4,000 per person per year over subsequent years. That equates to a range of 40% to 50% of GDP in the first year.
I am not sure I completely agree with the analysis, but let’s just say that does occur. What if Greece suffers immeasurably after the exit as a deliberate consequence of the failings of the EU to provide a valid mechanism for economic recovery (or even punitive measures) after a financial shock.
The rest of the periphery may baulk at an exit and stick with the grinding drop in their living standards that comes with acceptance of bailouts. But is a group of states ruled by economic fear a sustainable basis for a “union”.