Greek Drama Continues to Drag Down the Market

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greek exit from the euro zone
greek exit from the euro zone
Grexit, Greece exiting the Euro, visualized by red line crossing out Greek word for Euro on Euro banknotes

The Dow Jones edged lower due to fears that the Greek drama is going to resolve negatively. I have suspected all along that the market has already priced in the possibility of a Greek exit in the European monetary union. This should not be a surprise. Greece has so much debt, doesn’t have enough revenues, and has too many demographic issues to truly crawl out of its fiscal hole.

I have even raised, in the past, the potential black swan scenario of a military coup in Greece. Keep in mind that a Greek military coup and military dictatorship is not unheard of. Greece used to be ruled by a dictatorship as recently as the early 1970s. History might repeat itself.

On a more favorable note, Greece might just simply leave the European union. This might not necessarily be a terrible thing as far as Greece is concerned. By going back to the Greek drachma, Greece can finally regain control over its debt. How? One simple trick: devaluation.

Devaluation is not a preferred option. You are basically kicking your creditors in the face when you do that. It makes you a financial pariah, and many bankers wouldn’t want to deal with you.

However, the resentment is short-lived. Bankers have a lot of money to lend and they are pursuing a certain rate of return. When the dust settles after devaluation, guess what happens. Bankers are making loans again. It is a very familiar pattern. You only need to study the history of Latin America to understand what I am talking about.

A Greek exit is almost sure to happen. There is just too much interest due, and Greece simply doesn’t have the money. I highly suspect that this is the reason why German bankers refused Greek terms for the bailout. There is really no other way to resolve this issue except for a Greek exit.

The big problem here is that it may lead to a dangerous precedent for the remaining members of the European monetary union. It can set a pattern where a member is irresponsible, racks up a lot of debt, takes bailout money, and then bails out at the end. As I have mentioned earlier, the whole idea of a European monetary union just simply doesn’t make any fiscal of political sense.

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