Greek tragedy

21 June 2011 Last updated at 12:52 GMT By Russell Hotten Business reporter, BBC News Some economists believe withdrawing from the euro would cause Greece no more pain than staying in Is this the endgame for the euro?

Some economists and politicians have forecast the euro's demise for years. The game, they argue, is just taking longer than expected to reach its denouement.

But there is no doubt that the issue is moving centre stage. The crisis in Greece has exposed the biggest fault lines in the single currency project since the euro was introduced in 1999.

On Monday former Foreign Secretary Jack Straw said the euro is facing a "slow death".

The Labour MP said the eurozone "cannot last" in its current form, and the UK government should prepare for its potential collapse.

On Tuesday, Prime Minister David Cameron insisted that the euro would not collapse, because member states "will not let it".

But Mr Cameron is no doubt more than relieved that Britain is not a member of the single currency.

The financial markets do not seem to be as confident as European politicians that the eurozone will hold together.

"All economists would agree that the debt dynamics of Greece are unsustainable," said Neil MacKinnon, global strategist VTB Capital told the BBC.

"A scenario in which Greece at some stage decides that an exit from monetary union is much more preferable to a diet of economic contraction and fiscal austerity can't be rule out," he said.

The Centre for Economics and Business Research (CEBR) goes further, predicting that the eurozone is "almost certain" to break up within five years and "probably" by 2013.

And with a eurozone break-up, what becomes of the euro and its status as the second largest reserve currency, as well as the second most traded currency in the world after the dollar?

Investor confidence in the euro would most likely collapse.

In May, when Germany's Der Spiegel magazine reported that Greece was threatening a euro withdrawal (which Athens denied) the currency had its worse two-day fall since December 2008.

According to the CEBR, several forces make a eurozone break up inevitable: slow economic recovery in Greece, Portugal, Spain and Italy; tough austerity packages; lacklustre export growth; an eventual unwillingness of countries and institutions to keep funding bail-outs.

Without a break-up of the eurozone, the CEBR argues, economic growth in southern Europe will be below 1.5% in every year to 2015.

Moment will come

Only by exiting the bloc might the economies be able to re-adjust through currency devaluation and usher in growth that would allow them to pay off their debts.

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The main reason for Argentina's rapid recovery was that it was finally freed from policies that stifled growth. The same would be true for Greece if it were to drop the euro”

End Quote Mark Weisbrot, economist CEBR chief executive Douglas McWilliams says: "Sooner or later both the Greek population and international creditors will tire of fighting a losing battle, leading to a break-up of the currency union as Greece pulls out, probably followed by other countries.

"A series of bail-out packages and eventual debt restructuring will delay this moment, but it will come," he said.

At the moment, the eurozone's 'core' - specifically, Germany - has much to gain from a stable euro. But eventually, the cost of bail-outs will become too great, he said.

Greece's exit from the euro would be disastrous for French and German banks, which are heavily exposed to the Mediterranean country.

Mr McWilliams adds: "The danger of knock-on effects means that a [banking sector] bail-out like that which followed Lehman's collapse will be required."

For many people, however, this is precisely why an orderly bail-out and/or restructuring of the eurozone's weaker members must continue.

The one thing worse than staying in the euro at this moment would be to exit it, they say.

On Monday a group of business leaders from France and Germany sent open letters to the media in their respective countries warning that "a failure of the euro would be a fatal blow to Europe".

No country has left the euro. It would be a big leap into the unknown, and one of the financial markets' greatest worries is the "law of unintended consequences".

Indeed, there are no exit clauses in the treaties that brought the eurozone together.

The European Central Bank (ECB) has spoken of the "considerable risks and difficulties and... substantial legal complications" should a eurozone member try to restore its old currency.

If Greece, say, exited the eurozone, euro notes would be taken out of circulation and exchanged for new drachmas, a process which the ECB would have to supervise.

Even basic financial transactions like simple loans and mortgages would have to be re-organised, never mind multi-billion-euro international business deals.

It could become an international legal minefield, taking years if not decades to resolve in the courts.

The drachma would no doubt plunge in value against the euro and other currencies. That in itself could have positive benefits - for example, in exporting goods and promoting tourism.

Competitive devaluation

But as a Greek exit would probably happen only after it had defaulted on its debts, the financial markets would take a dim view and refuse to lend to Athens for years.

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If Greece or anyone else were to adopt its own independent currency, the cost of borrowing for pretty much every other eurozone member - with the exception of Germany, Luxembourg and the Netherlands - would rise”

End Quote Robert Peston Business editor, BBC News In any case, a Greek withdrawal might encourage others to do the same, sparking competitive devaluation and wiping out any first-mover advantage.

For economist Mark Weisbrot, director of Washington-based Center for Economic and Policy Research, Greece has little to lose from leaving the euro.

He compares the Greek crisis to Argentina's financial nightmare in the early 2000s, when the country defaulted on its debts and unpegged its currency from the dollar.

Most economists predicted disaster for Argentina, but in fact the economy grew rapidly, he said.

"The main reason for Argentina's rapid recovery was that it was finally freed from adhering to fiscal and monetary policies that stifled growth," he wrote in the New York Times. "The same would be true for Greece if it were to drop the euro."

Nobel-prize winning economist Paul Krugman has said that comparing Greece to Argentina is "an imperfect parallel".

In particular, the South American country still had the peso and so the mechanics of de-pegging were easier.

Mr Krugman did not completely rule out a euro exit for Greece, but said he was not yet "ready to counsel" such a move - preferring a debt restructuring as the best way forward.

Even so, some serious thinkers are starting to think the unthinkable.

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Greek tragedy

15 June 2011 Last updated at 14:21 GMT By Nigel Cassidy Business correspondent, BBC News Anti-austerity protests in Athens are getting more heated The indignant crowds occupying the Syntagma central square in Athens are not the only people desperate for a new solution to their very own Greek tragedy of looming insolvency.

Some 1,300 or so miles away, finance ministers in Greece's European partner countries still seem some way off agreeing a plan to put before the full EU Summit at the end of next week on 24 June.

And if they don't come up with a workable solution, the bond and financial markets will be merciless.

Greece is in the process of receiving the 110bn euros of loans agreed in May last year from the full EU, the eurozone member countries and the IMF. But it needs more.

The extra lifeline would cover a funding gap of 30bn euros in 2012. Over three years, the likely shortfall is put at 90bn euros.

It all has to be resolved as soon as possible, because the IMF will not deliver the next 12bn-euro tranche of existing programme cash until a convincing plan is in place to show how that full 30bn-euro gap is to be plugged.

The talk is of a further 45bn euros to come from the EU and the IMF, plus 30bn euros more of asset sales in Greece.

Changing the profile

Then comes the even more difficult bit to agree on. Germany wants bondholders to provide a further 30bn euros of relief by getting Athens' lenders to swop their bonds for new ones with extended, seven-year maturities.

That would give Greece more time to reform its economy - although it wouldn't wipe out any of the debt obligations.

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All the parties - the Germans, the Eurozone, the ECB and the Greeks - are playing a game of chicken”

End Quote Jason Manolopoulos Author of Greece's Odious Debt Politicos in Brussels like to call this "reprofiling" of loans. But the credit agencies would construe this as a pure and simple default.

There is a possible alternative on the table. The European Central Bank, France and the European Commission have been promoting a potentially less traumatic kind of debt swap - a procedure known as the "Vienna initiative".

This takes its cue from an arrangement which helped contain the debt crisis in Eastern Europe two years ago. Lenders publicly pledged to roll over their funding without any formal default or restructuring of debt. But it's a long shot.

Meanwhile, the ECB continues to warn that such a "credit event", as it is called, could cause rapidly spreading panic, of the kind seen after the 2008 collapse of Lehman Brothers in the US.

It's noteworthy that the rest of Europe is now at least talking about moves to give Greece more time to pay - or to have some of its debts written off entirely.

Strong-arm tactics?

The focus is also moving on whether bondholders might be persuaded to change the terms of their loans or would have their arms twisted.

Questioned in the European Parliament, the president designate of the ECB, Mario Draghi, held the bank's line on this, saying that he still did not understand whether bondholders would have any choice in whether they gave concessions to their borrowers.

"There are basically two initiatives that are under discussion," he told MEPs. "One is the Vienna initiative, which looks to me entirely voluntary. Another one is a debt exchange, which I haven't understood whether it is voluntary or it could end up being involuntary."

For one, the Belgian finance minister, Didier Reynders, suggested the EU was "very close" to forging a rollover agreement with bondholders.

But he said forcing bondholders' hands would be dangerous. Not just for Greece, but for Portugal and the Irish Republic later on.

As the Luxembourg finance minister hinted after Tuesday's meeting, some of the talk has been around trying to identify and plug areas of likely contagion in the rest of Europe in the event of a Greek default.

Jason Manolopoulos is an Athens-based fund manager - co-founder of the emerging markets hedge fund, Dromeus Capital. He is also author of a new book, called Greece's Odious Debt.

He is convinced Europe will find the necessary financial sticking plaster to keep Greece alive in the next few weeks.

Passing the buck

"All the parties - the Germans, the Eurozone, the ECB and the Greeks - are playing a game of chicken," Mr Manolopoulos says.

"They each have different goals. The Greek government is trying to protect its sovereignty, the ECB is trying to preserve its credibility, while several nations involved are thinking about their electorates."

He says Europe knows that when it comes to a final vote, it is not yet ready to face the consequences that might follow from allowing a default.

Mr Manolopoulos says what is far less certain is what possible "business model" Greece itself may adopt to try and pay its way in the future.

How will it retrain and support the many likely to lose their livelihoods, as present and future spending cuts kick in?

Greece may not be able to devalue its euro currency to help exports. But it has cut imports. And it has already seen "internal devaluation" of between 20% and 40% in key costs such as wages and house rents.

In spite of everything that it has done so far, in financial terms it remains a failed state. Yet if it is still unrealistic for the country to become a specialist, "value-added" producer on German lines, can it possibly carry out the labour and market reforms that would be needed to turn it into a low-cost producer?

After spending time speaking to many of the protesters on the streets, Mr Manolopoulos says Greece simply has no alternative proposals to a painful period of austerity.

The only common plea he hears on the streets is that the current array of politicians of all parties should leave office en masse - and leave a new generation to determine their country's economic future.

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