Greek Euro Exit Draws Nigh

Greece Has 46 Hours To Exit Euro
Greece may have only a 46-hour window of opportunity should it need to plot a route out of the euro.

That’s how much time the country’s leaders would probably have to enact any departure from the single currency while global markets are largely closed, from the end of trading in New York on a Friday to Monday’s market opening in Wellington, New Zealand, based on a synthesis of euro-exit scenarios from 21 economists, analysts and academics.

Over the two days, leaders would have to calm civil unrest while managing a potential sovereign default, planning a new currency, recapitalizing the banks, stemming the outflow of capital and seeking a way to pay bills once the bailout lifeline is cut. The risk is that the task would overwhelm any new government in a country that has had to be rescued twice since 2010 because it couldn’t manage its public finances.

“Leaving is difficult and messy, so anyone who thinks it’s easy is just wrong,” said Lorenzo Bini Smaghi, who left the European Central Bank’s executive board last year, in a phone interview. “The Greeks must be rational and protect themselves from rash decisions that they will live to regret. Leaving the euro is not the answer to their problems.” He declined to say whether he thought an exit would occur.

European leaders meeting today in Brussels are seeking to keep Greece within the 17-nation single currency as new French President Francois Hollande and German Chancellor Angela Merkel disagree on how much austerity is needed to stem the crisis.

In the end Greece will stick to its commitments, said Bill O’Neill, chief investment officer for Europe, Middle East and Africa at Merrill Lynch Wealth Management in London.

We don’t think Greece will walk away, even if the result after the June 17 election is difficult for the pro-bailout parties,” he said in a May 21 interview on Bloomberg Television’s “The Pulse” with Maryam Nemazee. “We don’t think they will deliberately step away from the bailout. There will be a process of negotiation in a worst-case scenario, but we don’t believe a Greek exit is going to happen.”

“A country leaving the euro zone should introduce its new currency at parity with the euro,” Capital Economics economists led by Roger Bootle wrote in a paper submitted for the 2012 Wolfson Economics Prize. “This would not only avoid the temptation for retailers to round up but also make clear to consumers that this had not been the case, and promote acceptance and understanding throughout the economy.”

Cash Needs

At that time, the government could also commission a new set of banknotes and coins.
De La Rue Plc (DLAR), a U.K. company that prints notes for more than 150 countries, is already preparing for a reintroduction of the drachma, the London-based Times newspaper said on May 18. The company has asked production staff to choose potential security threads for use in new banknotes and has retrieved covers from an old collection of copper molds, used for watermarks, the newspaper said, citing people it didn’t name.

De La Rue declined to comment on the newspaper report.

My view:

The return of the drachma is near.

Political jawboning about Greece not leaving the Euro are simply wishful thinking.

Greece has a massive budget deficit in addition to a huge trade deficit.

With a debt load approaching 170% of GDP, it is mathematically impossible for Greece to repay its Euro debts despite the most severe austerity measures.

Contrary to the ECB's comments, the only solution for Greece is default upon their debt and return to their own currency.

Such a move will lock Greece out of the bond market for years, but will force the country to restructure its economy in a productive way.  The way forward will be harsh, yet the lesser evil compared to staying in the prison of the Euro currency.

Timing of the exit remains an open question.

Months ago, we estimated that an Easter or Ascension day exit was possible.  Clearly those estimates were too early.  We now expect a exit as soon as June 4, 2012 (Whit Monday Holiday - Orthodox Pentecost).

Whether the Greek exit is associated around this public holiday or not remains to be seen, nevertheless, Europe will soon be a different place once the implications of a Euro exit are fully digested.

Expect increasing volatility in the markets over several weeks and months as the financial effects grow globally.