Germany is making preparations for a nearing Greek exit of the Eurozone which could come as soon as March 2012.
Greece is waiting for another tranche of bailout money from the ECB/IMF and has to adhere to another round of austerity measures. Such may not be forthcoming and Greece mentioned the idea of simply leaving the Eurozone voluntarily and return to its legacy currency according the latest statement from the Greek Parliament.
Such a move by Greece, as unsurprising as it may seem to some economists, will have two major consequences.
The positive result will be that the Eurozone in itself will become more stable and stronger and will have one less weak link to worry about. It also means that funding either through the ECB/IMF, the EFSF (European Financial Stability Fund) or the EMS (European Stability Mechanism) will be reduced dramatically to better support the ongoing financial uncertainty in Spain and Italy.
The negative result will be that the Greek Drachma (its old legacy currency) will probably have a 50% devaluation compared to 2001.
The side effect will also be a major devaluation of out standing Greek bonds and this is where Germany comes into play.
German banks, as other European banks such as French financial institutions, are known to hold large amounts of Greek bonds on their balance sheet although exact figures are not available.
German Chancellor Angela Merkel is preparing to fund the German banks and inject extra capital should such a deep devaluation of holdings occur which would put extra stress on Tier I capital requirements as imposed by Basel III.
Germany is taking a very well planned and preventive approach to what may ultimately be part of the solution for the Eurozone but realizes that a recovery does not come with some pain.
Mrs. Merkel also realizes that the final result will have a positive impact on the Eurozone, the European economy and the euro from an international perspective.
There may still be some problems in the immediate future with an economic slow down, a potential recession and a slower trade activity, i.e. imports as a result of this, but when one thinks long term instead of the band aid for tomorrow then we just let experience run its course.
It may very well be that the US exports less to Europe because of slow growth, but if Germany can take the lead and allow Greece to go its own way, then international trade and economic activity will restore itself by 2015.
Germany’s initiative may also open the door for the creation of a fiscal union which is the first step towards the issuance of very desirable Eurobonds.
The next two months will bring the answer so we know what the future will look like: German strength or Greek weakness.
Written by Nick Doms © 2012, all rights reserved.
Comments