Thoughts on where this whole situation is going to lead?
I'm still shocked that the fate of a small Mediterranean nation with a GDP less than LA's and about the size of Chicago's has precipitated such a huge drop in the EURUSD... I was personally long the Euro before cutting my losses short
It's my understanding that there is an acceptable bailout deal on the table (acceptable to Greece and the IMF), but that Germany won't sign off on it because the interest rates being offered to Greece aren't punitive enough. In other words, because they've put "austerity measures" in place, the IMF is offering them a better interest rate on the bailout package, but Germany (and other less vocal EU partners) want to see Greece punished in order to send a message to Spain, Portugal, Ireland, and the other weak sisters.
The underlying assumption is that if Greece receives a good deal it will send a message to the other weak countries that the kind of stupid shit Greece did to get here will be rewarded. Sorry if I'm rambling, it's late.
If I were a betting man (and I am), I'd wager 60/40 that Greece defaults. Hell, probably 70/30, because even if the aid package is approved, it might already be too late.
The reason Germany is not happy is because this loan that is being discussed is going to be provided by the European Bank & the EU Commission. However, they have agreed to the standard IMF 3-year rate on loans, which is effectively 5% (3% + 1.5% (SDR) + 0.5% maintenance fee), the current market rate is at 7.3%. Actually, Greece wanted the rate to be 4-4.5% and of course, Germany and other members are not very enthusiastic. The big difference is that the European Bank & the EU Commission would probably not place as many and as harsh conditions for the loan as the IMF would.
And to the original question - Greece is in sh*t load of trouble. They just shored up the banks with EUR 1.5bn but everyone in the region and in Greece is pulling their money out. The economy is in shambles and even tourism has been bad (this is one of their main revenue sources).
I doubt the EU would let them go bankrupt, considering the effects it would have on the euro. Worst case scenario they will give them to the IMF, which will shore them up and suffocate the life out of them for the next 10 years. Trust me Europeans would like to see them go down but they really don't want a Lehman on their hands, considering the interdependency on the euro.
I'm trying to wrap my head around what impact that would have on the euro... any thoughts there? Thanks Edmundo, great response
As for the collapse and discontinuation of the Euro (which I don't think will happen), the larger European economies already have infrastructure in place for that contingency. For example, I live in France and even though the Euro has been the currency for many years now, all prices still have to be quoted in French Francs as well. If you're at the grocery store (or any other retailer) you'll see a price tag where the price is obviously in Euros, but at the bottom there will also be the price in Francs (in small print).
I know there are plenty of older Europeans who don't fucking trust anyone and held on to all their old currency, waiting for the day one of their ancient enemies would fuck the whole thing up and cause the Euro to collapse. I'd only be mildly surprised to learn that Germany has already started printing D-Marks again, just in case...
Ultimately, I don't think it will come to that, though.
Plus if the aid package is too late, the sentiment on Greek banks will have a lot o people pulling out their money. Thus leading to a very devalued Euro (not enough to kill it) and raising the value of the dollar.
I don't know about you, but from what i know, an expensive dollar is not going to help a recession in the states. (exports)
The problem isn't going to stop after Greece. Although the deal seems to be going back and forth, I think that an agreement will be made (even if IMF has to put in more than 1/3).
However, the IMF is walking a thin line with their involvement. This could open a series of other struggling economies releasing the news of their augmented debts (spain, ireland, portugal). If Greece's actual deficit was 250% of their falsified statement, can we really think that the other countries aren't forging their numbers as well? It was only a matter of time before Greece had to come clean. What about the other countries if their deficits rise? Can the IMF just bail out everyone....
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