Euro Extends Losses as Greece Threatens to Drop Euro
by Kathy LienDirector of Currency Research, GFT
Greece has been tossing threats at the EU with the goal of pressuring them to come up with a financial aid mechanism. Last week, they threatened to go to the IMF if no aid is provided and this morning, they upgraded their threats by saying that "if no EU support mechanism is decided soon, the euro will make no sense." With words as severe as these, it is hard to believe that Greece does not need aid as the Prime Minister and other EU leaders have repeatedly suggested. Why would the Greek government would put so much pressure on EU leaders if they do not feel that they would need to utilize the support mechanism very soon. Opening up a Can of Worms
Although Greece only represents 2 percent of the entire Eurozone's GDP, the mere possibility of a member of the Eurozone dropping out the monetary union would not only be a huge embarrassment for the region but it would also open up a can of worms. Spain and Portugal are in a similar but less severe situation and if Greece seriously considers leaving the Eurozone, everyone will start to wonder if the entire Eurozone will crumble. The viability of the Eurozone will come into question and as we have seen today, the sheer possibility of this becoming a reality has pushed the euro towards its 10 month lows.
Last week, the Greek Prime Minister said if EU leaders fail to come up with a bailout package by their March 25 to 26 meeting, they will consider going to the IMF for aid. Unfortunately these are the problems of being a part of a monetary and not a fiscal union. The U.S. for example would never go to the IMF if California went bankrupt but if they did, we could imagine what type of impact it would have on the U.S. dollar because it would suggest that the U.S. government does not have enough money to bail out one of its own.
What Will a Greek Bailout Look Like
Although the German and French are having a difficult time agreeing on what type of lifeline to offer to Greece, the intensified pressure by the Greek government could force a compromise. In our opinion, the final bailout package will include a combination of bilateral loans with the IMF as a final backstop. Germany is a major player and the fact that did not even want Greece to be on the agenda at this week's meeting means that it will be a heated discussion that will culminate with a watered down support mechanism for Greece - but that is still better than no support at all. Germany believes that it would be political suicide to ask their citizens to pay for the problems of another country but France and Italy are adamantly opposed to Greece knocking on the door of the IMF. German Chancellor Angela Merkel said that in the absence of a willing European lender, the “IMF would probably have to be the way out right now if action were to be taken” and even went a step further to add that there should be a mechanism to expel countries out of the Eurozone if they persistently break the Treaty’s rules. Although she made it clear that this was not a jab at Greece and is more of a long term consideration, it could still affect Greece if they fall back into their old ways after this crisis is resolved.
by Kathy LienDirector of Currency Research, GFT
Greece has been tossing threats at the EU with the goal of pressuring them to come up with a financial aid mechanism. Last week, they threatened to go to the IMF if no aid is provided and this morning, they upgraded their threats by saying that "if no EU support mechanism is decided soon, the euro will make no sense." With words as severe as these, it is hard to believe that Greece does not need aid as the Prime Minister and other EU leaders have repeatedly suggested. Why would the Greek government would put so much pressure on EU leaders if they do not feel that they would need to utilize the support mechanism very soon. Opening up a Can of Worms
Although Greece only represents 2 percent of the entire Eurozone's GDP, the mere possibility of a member of the Eurozone dropping out the monetary union would not only be a huge embarrassment for the region but it would also open up a can of worms. Spain and Portugal are in a similar but less severe situation and if Greece seriously considers leaving the Eurozone, everyone will start to wonder if the entire Eurozone will crumble. The viability of the Eurozone will come into question and as we have seen today, the sheer possibility of this becoming a reality has pushed the euro towards its 10 month lows.
Last week, the Greek Prime Minister said if EU leaders fail to come up with a bailout package by their March 25 to 26 meeting, they will consider going to the IMF for aid. Unfortunately these are the problems of being a part of a monetary and not a fiscal union. The U.S. for example would never go to the IMF if California went bankrupt but if they did, we could imagine what type of impact it would have on the U.S. dollar because it would suggest that the U.S. government does not have enough money to bail out one of its own.
What Will a Greek Bailout Look Like
Although the German and French are having a difficult time agreeing on what type of lifeline to offer to Greece, the intensified pressure by the Greek government could force a compromise. In our opinion, the final bailout package will include a combination of bilateral loans with the IMF as a final backstop. Germany is a major player and the fact that did not even want Greece to be on the agenda at this week's meeting means that it will be a heated discussion that will culminate with a watered down support mechanism for Greece - but that is still better than no support at all. Germany believes that it would be political suicide to ask their citizens to pay for the problems of another country but France and Italy are adamantly opposed to Greece knocking on the door of the IMF. German Chancellor Angela Merkel said that in the absence of a willing European lender, the “IMF would probably have to be the way out right now if action were to be taken” and even went a step further to add that there should be a mechanism to expel countries out of the Eurozone if they persistently break the Treaty’s rules. Although she made it clear that this was not a jab at Greece and is more of a long term consideration, it could still affect Greece if they fall back into their old ways after this crisis is resolved.