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February 18, 2015

Greece In Mission Impossible

By Lance Roberts at Street Talk Live
Greece has once again taken center stage as the recent elections put a pro-Greek/anti-austerity party in charge of the country's future. The good news for the Greek population is that the government will raise minimum wages, increase government spending and cut taxes. The bad news is that Greece is broke.
The worse news is that, for the Eurozone, the risk of a Greek debt default has risen sharply.
"So, let them default, it just Greece. Better yet, just kick them out of the Eurozone entirely."
Simply put, neither of these options are palatable. If Greece defaults, considering that banks and hedge funds have loaded up on Greek debt assuming Central Banks will always bail them out, it would lead to a potential credit crisis on the magnitude of the 2008 event. 
Secondly, if Greece is allowed to exit from the Eurozone, which means they go back to printing the Drachma, they can deflate their debt by printing currency. The risk is that France, Italy, Spain and every other country in the Eurozone realizes that being a sovereign currency issuer is a way out of their debt problems without changing their spending habits. The end of the ECB and the Eurozone "dream" would shortly follow with those in positions of power would be quickly dethroned.
In the end, I fully expect that after a great deal of stress over the weekend, the Eurozone will eventually cave-in to the demands of Greece and provide additional funding.However, I also highly expect that we are in the final stages of the life the Eurozone as "anti-austerity" groups are rising in power. It is likely only a function of time before the ECB, and its demands for debt-deflation, are eradicated entirely.
1) Germany Faces Impossible Choice by Ambrose Evans-Pritchard via The Telegraph
"The EU elites themselves have run their currency experiment into the ground by imposing synchronized monetary, fiscal, and banking contraction on the southern half of EMU, in defiance of known economic science and the lessons of the 1930s. It is they who pushed the eurozone into deflation, and thereby pushed the debtor states further into compound-interest traps.
It is they who deployed the EMU policy machinery to uphold the interests of creditors, refusing to acknowledge that the root cause of Europe's crisis was a flood excess capital flows into vulnerable economies. It is they who prevented a US-style recovery from the financial crisis, and they should not be surprised that such historic errors are coming back to haunt."
2) A Greece Default Would Unleash A 1930's Event by Steve Forbes via Forbes
"Europe’s troubled economies will continue to stagnate. As the elections in Greece demonstrate, these troubles are leading to ugly political repercussions. France’s xenophobic, fascistic National Front has gained immense new support. Radicals are set to dominate Spain’s elections later this year. May elections in Britain could set in motion a train of events leading to the Sceptred Isle’s withdrawal from the EU.
A collapse of the EU and the euro would be disastrous, putting the world on a chaotic course not seen since the 1930s."
Read Also: How Fast Would A Greek Contagion Spread via Zero Hedge
3) 7 Reasons To Pay Attention To Greece by Mohamed El-Erian via Business Insider
"In sum, this country’s inclination to ignore Greece is very understandable. It is also not a good idea; and not just because high frequency fluctuations in the Greek drama add to volatility in US markets. It is chiefly due to what a possible recession in Europe would imply for a US economic recovery that is yet to attain escape velocity."
4) The Greek Austerity Myth by Daniel Gros via Project Syndicate
"To be sure, one can reasonably argue that austerity in the eurozone has been excessive, and that fiscal deficits should have been much larger to sustain demand. But only governments with access to market finance can use expansionary fiscal policy to boost demand. For Greece, higher spending would have to be financed by lending from one or more official institutions.
For the same reason, it is disingenuous to claim that the troika forced Greece into excessive austerity. Had Greece not received financial support in 2010, it would have had to cut its fiscal deficit from more than 10% of GDP to zero immediately. By financing continued deficits until 2013, the troika actually enabled Greece to delay austerity.
Of course, Greece is not the first country to request emergency financing to delay budget cuts, and then complain that the cuts are excessive once the worst is over."
5) ECB Raises The Pressure On Greece by Renee Maltezou via Reuters
"After euro zone finance ministers failed to agree on a joint statement on the way forward on Greece's debt crisis, the ECB's Governing Council held a short-notice teleconference to discuss how long it could continue to keep Greek banks afloat.
The ECB declined comment, but two sources familiar with the matter said it concerned the provision of Emergency Liquidity Assistance (ELA) by the Greek central bank, which the ECB authorized as a temporary expedient when it stopped accepting Greek government bonds in return for funding last week."
Conspiracy Theory: Is Russia Trying To Pry Greece Out Of The Eurozone by Rob Garver via CNBC
"Ma, Dad is so stubborn. What he says goes. 'Ah, the man is the head of the house!' / 'Let me tell you something, Toula. The man is the head, but the woman is the neck. And she can turn the head any way she wants.'" - My Big Fat Greek Wedding
Courtesy Lance Roberts at StreetTalkLive.com (EconMatters author archive here)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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