The Growing Greek Euro Tragedy

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Greek Euro TragedyIf you are a reader of the financial press and are wondering what on earth is going on with the Greek eurozone debt negotiations, I’m with you.

If you are thinking that the situation is absurd, I hear you. Greece seems to be unable to afford to stay in the euro but it has no plans to leave voluntarily and there is no legal mechanism that allows the rest of the club to kick it out.

In a recent post I wrote:

I’m sure that Brussels will find a way to fudge the issue again and kick the can even further down the road, but there will be some very sticky moments ahead.

No sooner said than done!

Friday’s headline on Reuters is scarcely believable – if you are unfamiliar with the workings of the EU. Neither Grexit, nor Grexident. Euro and ‘drachma’ in parallel?

In case you have not been keeping up, a Grexit is the nickname for the scenario in which Greece exits the euro. Grexident is a recently coined phrase for a situation in which Greece leaves the euro by accident, probably by failing to manage to renegotiate it’s debt and interest burden.

The concept of Greece having two currencies, the euro plus another, sounds awful. One will deteriorate in value at an alarming speed, leaving the economy and the Greek people impoverished. Meanwhile, the other will be a store of the national debt denominated in a much stronger currency. The interest and principle will be even less likely to be repaid under such a system.

If all this sounds nuts, I’m with you.

The same article describes capital and currency controls for Greece. This won’t be a first if they are implemented – Cyprus has something similar in force. So much for freedom of movement for goods, services, people and capital!

Such a situation would also likely be a disaster for an already fragile banking system. It has been reported often in recent weeks that money is flowing out of the Greek banks at an alarming rate which much be weakening them by the day.

If there is either an exit or the introduction of a parallel currency, a full on bank run is almost guaranteed. As bad as that would be, with the global banking sector still in a weakened and vulnerable state, who knows what other banks or financial institutions might suddenly fall over.

If all this sounds really, really nuts, I’m with you.

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