Greeks Don’t Need Austerity, Just More Ouzo & Drachmas

Seven years into an economic Depression and the Greeks are demanding a change? Go figure! After their economy crashed in 2008 the Greeks have been living upon the kindness of strangers – with strings attached of course.

The European Central Bank (ECB) has given the Greeks Billions in new debt to prevent banking defaults in exchange for financial reforms and its twin sister – Austerity!

Greece Stock Market

To Europe’s chagrin Greece just elected an anti-Europe, anti-austerity  President who’s entire “raison de terre” is the promise of no more strings and no more austerity. President Syriza insists that Europe forgive/adjust part of its debt and eliminate the austerity reforms to allow new spending to make his people happy – Or else – he will default on his Euro debts and leave the currency union in favor of the old Greek Drachma.

In 2012 when Greece was on the verge of default along with much of southern Europe, the ECB blinked and bailed everyone out as long as austerity was agreed upon. This time Europe is financially stronger, the economies are trending higher and tiny Greece can be sacrificed without a Euro wide financial epidemic. Syriza, the Drachma Queen may not be bluffing, but Germany and the ECB may not be either. Meanwhile Greek smart money has left the banks for Gold coins, safety deposit boxes and often behind a loose tile in the bedroom.

Greek depsoits crash

The dotted line and solid line above should be viewed in combination as these two sources of cash for Greece were exceptionally elevated in 2012 and 2013. As the election approached the ECB again raised its bailout package to Greece to stabilize its deteriorating banks and likely the hidden agenda of influencing the Greek elections away from Syriza as depositors panicked.  The unwanted election of an anti-Europe party extremist has thus far confirmed the fears of those inside and outside the country. Depositors have been withdrawing Euros from their Greek banks, investors have given up and now the ECB has declared Greek junk bonds are — Junk— and can no longer be used as collateral for Euro’s. As long as Syriza insists on haircuts by the European banks and investors and an end to austerity then the screws will tighten further each month.  The ECB and Greece have a long history of bluffing since this financial train wreck beset the continent in 2008. However, given the size of Greece and the Euro reserves, the ECB may risk losing Greece. Will they risk Portugal? If Greece and Portugal left the Union one can be sure that Spain or any other country in the Euro Union would then have leverage to demand whatever terms they choose.

For now the Greek flight to safety is boosting the Euro along with the temporary rebound in Oil, but should Greece leave the Euro we may again see the Euro devalue until the new recovery plan reveals accelerated economic growth. The odds favor a stop gap bailout of Greece until the summer.

How does this affect the US other than offering better travel deals to visit ancient ruins? Not much, other than the risk of contagion should Greece leave the Euro while the Eurozone stagnates sending Oil and interest rates still lower and stock markets panicking short term.  Too many what if’s for now…Stay tuned to this station.

 

 

 

 

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