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International News Title: Greek Euro Exit Likely Within Days The game is up for Greece as there is surely no way back for the country and a rapid Euro exit is increasingly likely. Without decisive action, the Euro is also likely to come under increasingly severe selling pressure as the financial crisis spreads. In theory, the EU and IMF can continue to provide the funds agreed under the existing bailout programme, but this will only delay the inevitable as on the current trajectory Greek public debt is likely to be at least 180% of GDP next year. The collateral row also illustrates how difficult it will be to keep EU members on board and willing to contribute to the planned second bailout package. Indeed, there is a high risk that the second bailout will unravel within the next few days. Greece will have to reflate its economy and default on its sovereign debt to help secure a medium-term recovery and this will not be possible within the Euro-zone. It is increasingly likely that Greece will be sacrificed politically and economically in an attempt to keep the rest of the Euro area intact and aim for a more orderly move towards greater fiscal union even though this may be politically impossible. The market’s vote of no confidence in Greece and the bailout package could hardly be clearer as Greek bond yields rise exponentionally, at one point the 2-year yields rose to a staggering 55% on Monday. The only question now appears to be the timing and method of Euro exit. Greece can either make the decision itself or it will effectively be forced out by the other members. The decision could be taken out of Greece’s hands by the German constitutional court which will rule on Wednesday whether the EU bailouts were legitimate under German Law. If the court rules unambiguously that the bailouts were unconstitutional then the Euro-zone in its current form would have no chance of survival as the peripheral countries would come under immediate and terminal attack. A more complex and less clearly defined ruling looks the more likely outcome which would demand additional guarantees for future aid. Such an outcome would also create market uncertainty and confusion. It would also make life even more difficult for Greece, but would not be decisive enough to force am immediate exit. More importantly, it would intensify political tensions in Germany as Chancellor Merkel would find it even more difficult to gain parliamentary support for an expanded EFSF as domestic opposition would increase further. Tensions are flaring throughout the Euro area as Italian bond yields rise even with the support of ECB buying. Last week, the ECB almost doubled its buying of peripheral bonds as they bought EUR13.3 compared with EUR6.7bn the previous week. Italian yields have still increased back to the 5.50% area and credit-default swaps also rose sharply on Monday. European banking stocks were also sold very heavily during Monday. The ECB is clearly extremely frustrated with the situation and has warned Italy not to slide on austerity measures in expectation that the ECB will prevent any market fall-out. The Italian government will continue to debate austerity measures on Tuesday at the same time as a General Strike has been called and the domestic willpower looks shattered. The political and economic developments appear to have a surreal quality with key political players calling for action to stem the crisis, but simply insisting that measures agreed previously need to be implemented in full and more quickly. The calls for austerity in the face of recessionary conditions and rising debts will simply not work as the outcome will be for a further increase in debt and even weaker growth while political support will crumble. In this environment, it is far from clear that the European authorities will be able to prevent a more substantial break-up of the Euro area. If Greece leaves the Euro, Portugal and Ireland would have great difficulties staying in while Italy would also be extremely vulnerable. The only logical policy is for Europe to chop away as much of the periphery as is required to stop the infection from destroying the core. If they act quickly and promise more fiscal co-operation, then the casualty list may be small. The longer a decision is delayed, the more likely it is that countries such as Italy will also be forced out of the Euro area with the emergence of a two-tier Euro area.
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#1. To: Capitalist Eric (#0)
Eric, this is relates to another thread from last week. Will the Eurozone completely collapse or will the PIIGS and a few others be kicked out? In my view, it will be the latter. German and French politicians are completely dedicated to building some type of integrated Europe, whether or not it includes all of Europe or just a part of it. About a 120 years ago, "Germany" was comprised of 50 or so Principalities. The two largest principalities were Austria and Prussia. There were proposals to consolidate the Principalities into a "Greater Germany". Austria declined, so they would up with a "lesser Germany" with Prussia in charge. There is a burning desire among some German politicians to create something larger than themselves. The French want to tag along in the vain notion that they can keep the Germans in check. The Eurozone is going to continue, but with far fewer countries, and Germany in a bigger role. Just watch.
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