The whole “cut them loose” argument regarding Greece’s gargantuan moutain of debt and its inability to pay the interest is ignorance. Looking back in recent history (2002 to present) when Argentina defaulted on its mountainous debt, 20 percent of the Italian pension system went with it and hundreds of thousands of Europeans lost a significant percentage of their lifetime savings. This was because European financial institutions and banks were heavily invested in Argentinian financial interests. Indeed, Argentina still refuses to pay, and likely never will.
If Greece defaults, 7 percent of the entire European Union financial institution liquidity disappears. Likewise, you cannot get paid in drachmas (Greece’s original currency) that are worth next to zero, and the Greek economy would likely still operate on Euros with or without EU approval. In fact, they’d be a constant 6% pain to the system through arbitrage.
Flaherty Says Some Nations Worried Greek Aid Package Too Small
Canadian Finance Minister Jim Flaherty said some Group of 20 countries, including Europeans, are concerned the aid package to Greece may be too small.
Flaherty, speaking to reporters in Washington on the sidelines of International Monetary Fund meetings, said leaders want to ensure any aid package would be a “one-time event.”
“Some countries think it’s not enough,” Flaherty said. “There is concern about making sure that the package is enough so that it’s a one-time event.”
Greece yesterday called for activation of a European Union- led aid package of as much as 45 billion euros ($60 billion) this year in an unprecedented test of the euro’s stability and Europe’s political unity. Source: Business Week
Bond holders, including foreign governments, pension plans (including Canada’s major plans, although a very small percentage amount), and other savings vehicles would be decimated. People in European Union banks would lose their deposits — unless the taxpayer bails out the banks through deposit insurance — which has nowhere near enough in the coffers to make up for these staggering losses.
Therefore, bond holders will take massive haircuts, losing both their clients’ equity as well as future interest yields. They will never get their savings back again. This includes mutual funds, ETF’s, and so on. Either way, taxpayers will foot this bill, or people with pensions (including state pensions) and bank deposits will lose their assets.
Greece bailout casts shadow over G20 talks
With figures of up to €45bn being talked of as a first instalment, Greece’s bailout will dwarf anything previously undertaken by the IMF. The huge sums and disputes over the terms of the joint aid package have cast a pall over the meeting of finance ministers in Washington for the G20 meeting this weekend.
“This is uncharted territory for the IMF,” said one British official who wished to remain anonymous.
Dominique Strauss-Kahn, the IMF’s managing director, said: “We have been working closely with the Greek authorities for some weeks on technical assistance, and have had a mission on the ground in Athens for a few days working with the authorities and the European Union. We are prepared to move expeditiously on this request.”
But relief may not come quickly enough for the international financial markets. Although the announcement of the joint IMF-EU action did calm some jitters on Friday, when the markets reopen tomorrow, questions over the amount required to tackle Greece’s public sector debts and the terms of the deal means international investors are likely to continue to shun the country.
Fears that Greece may default on its sovereign debt will grow if wrangling continues between the EU and the IMF over which body sets the conditions for the aid package, and the crucial deadline of 19 May is looming. On that date, Greece is scheduled to pay off a bond worth €8.5bn, with more due by the end of the month. Greece’s finance minister, George Papaconstantinou, said he expected that the first funds from the IMF would be received by 19 May. Source: The Guardian
If Greece were to go back to the Drachma, the currency would crash, probably by about 50 percent. This would mean their foreign debt would double – meaning that a debt default would be certain, rather than merely probable.
The crisis in confidence would cut credit throughout Europe and quite likely lead to a string of debt defaults in Spain, Portugal, Italy and Ireland. There would be no ‘solution’ to this like the GFC because public debt is the “last chance” for debt consolidation.
The EU has no choice but to pay the debt – not that that’s necessarily going to occur. Germany is likely to put such onerous conditions on this new “Wehrmacht Pact”, that it’s unlikely the Greek parliament will pass the economic reforms.