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Report: Germany is preparing for Greece’s exit from the euro zone

Two months ago I wrote that Germany is preparing for Greek bankruptcy based on information from German Magazine Der Spiegel. In that article, I mentioned the following:

There are two schools of thought about a Greek default concerning Spain and Italy. Portugal and Ireland are separate less systemic issues. In the one school, contagion increases and Spain and Italy come under pressure. The Germans are making preparations for this eventuality. In the second school of thought, a Greek default lessens pressure on Greece and Italy as Greece is seen as “a special case”.

I think the first school of thought is winning converts given events in the two months since I wrote this. Italy is perilously close to the edge and France, Belgium, and Austria have all been pulled in tow. Yesterday, Slovenia popped up out of nowhere too. It is now paying 7% for ten-year money too.

My warning since July:

All of the euro zone countries face liquidity constraints and all of them will eventually succumb to the rolling wave of yield spikes one by one until we get a systemic solution: full monetisation and union or break up.

Now, the new story is that the Germans are preparing for a euro zone exit by Greece (hat tip Kevin). Again the source is Spiegel:

The German government has been simulating a range of scenarios to prepare for a possible exit of Greece from the euro zone. Under a worst-worst-case scenario, the country could descend into a vicious circle of misery that could last decades.

Clearly, if you are in the first camp from above, Greece’s exit won’t be enough because the euro crisis is not about Greece, it’s about currency sovereignty.

This Spiegel story sounds like hearsay to me, but they got it right last time. I wouldn’t be telling you about it if I didn’t believe it was credible.

Follow the full story at the link below.

Source: Berlin Prepares for Possible Greek Exit from Euro Zone, Spiegel

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.

3 Comments

  1. Anonymous says:

    A multi decade collapse of Greece is likely if Greece exits the EZ and EU. There will be problems galore if Greece exits voluntarily. What about Greeks working abroad? Without EU membership many will be unable to stay where they are. Same for EU citizens in Greece. Then the losses for the masses who were not rich enough to transfer funds out of Greece will make it tough to resolve for what ever government. This will also mean losses for EU citizens living and working in Greece. 

    Greek businesses do not want to exit the EZ, and many can compete within the EZ. The separation of the sovereign from the banks will accelerate the recovery. A restructured Greek banking system will need more capital, because it will lack a lender of last resort until the sovereign problem is resolved.

    • Anon says:

      You mean multi-decade failures like Iceland and Argentina?

      Then why were those economies growing again 2-3 years after default?

      Seems like a Greek default would be a worst-worst-case for … Germany only.

      • Anonymous says:

        Not entirely. It depends on if they can eliminate the debts. If they can then yes growth will return within a couple of years. If not then they will be in trouble for a long time. The problems will be in the private debts, just as Iceland is experiencing now. Icelandic mortgages were written in third party currencies. That will be the same for Greeks. The mortgages might be in euros but if they exit the incomes will be in Drachmas. Even so with the internal devaluation the surplus funds to grow will not exist as so much will go towards debt repayment. Hence a long struggle. So expect a Hungarian type solution for external private debts. If they stay within the EU it would be easier, outside they could find hundreds of thousands of Greeks being forced to repatriate, as right to work will end unless agreement is reached. It is not a simple issue. Inside or outside the EU adds new problems.

        A Greek default will have minimal impact on Germany, and they have enough bank reserves to cover that. It is the impact on France that will impact Germany. A weakened France could cost the Germans far more. Lower exports are just the start. If Greece has to take a 100% haircut on greek debts which is likely then it will significantly weaken the big French banks. Since these are state owned and re-capitalisation will be impossible without impacting French sovereign debt. Which is already an issue. 

  2. David Lazarus says:

    A multi decade collapse of Greece is likely if Greece exits the EZ and EU. There will be problems galore if Greece exits voluntarily. What about Greeks working abroad? Without EU membership many will be unable to stay where they are. Same for EU citizens in Greece. Then the losses for the masses who were not rich enough to transfer funds out of Greece will make it tough to resolve for what ever government. This will also mean losses for EU citizens living and working in Greece. 

    Greek businesses do not want to exit the EZ, and many can compete within the EZ. The separation of the sovereign from the banks will accelerate the recovery. A restructured Greek banking system will need more capital, because it will lack a lender of last resort until the sovereign problem is resolved.

    • Anon says:

      You mean multi-decade failures like Iceland and Argentina?

      Then why were those economies growing again 2-3 years after default?

      Seems like a Greek default would be a worst-worst-case for … Germany only.

      • David Lazarus says:

        Not entirely. It depends on if they can eliminate the debts. If they can then yes growth will return within a couple of years. If not then they will be in trouble for a long time. The problems will be in the private debts, just as Iceland is experiencing now. Icelandic mortgages were written in third party currencies. That will be the same for Greeks. The mortgages might be in euros but if they exit the incomes will be in Drachmas. Even so with the internal devaluation the surplus funds to grow will not exist as so much will go towards debt repayment. Hence a long struggle. So expect a Hungarian type solution for external private debts. If they stay within the EU it would be easier, outside they could find hundreds of thousands of Greeks being forced to repatriate, as right to work will end unless agreement is reached. It is not a simple issue. Inside or outside the EU adds new problems.

        A Greek default will have minimal impact on Germany, and they have enough bank reserves to cover that. It is the impact on France that will impact Germany. A weakened France could cost the Germans far more. Lower exports are just the start. If Greece has to take a 100% haircut on greek debts which is likely then it will significantly weaken the big French banks. Since these are state owned and re-capitalisation will be impossible without impacting French sovereign debt. Which is already an issue.