Home > Currency, Economy, Financial Crisis, Sovereign Debt, Sovereign Default > Will Greece’s default bring down the Euro?

Will Greece’s default bring down the Euro?

… or will the Euro bring down Greece?

(That second question, which by and large I will equally deny, will be more thoroughly dealt with in a future post.)

In an interview in today’s Frankfurter Allgemeine Zeitung, probably Germany‘s most prestigious daily newspaper, titled “Helping Greece would be against the law“, professor of European Law Dr. Matthias Ruffert states unmistakably that each and every European Union treaty that established the European Currency Union and the European currency called the Euro prohibits any form of bailout of the Greek republic, its government or its bonds, be it via direct subsidies, by co-guaranteeing its debt or in any manner conceivable:

(See more statistical material in our References section!)

“… solche Hilfen sind eindeutig untersagt. Weder die EZB noch die Notenbanken des Euro-Systems dürfen Kredite an die Mitgliedsländer zu Konditionen unter dem Marktniveau vergeben. – … such assistance is definitely prohibited. Neither the ECB nor the Euro system central banks are allowed to extend credit to member states below market conditions.” (Translation & emphasis CrisisMaven)

While he states with much conviction that there is no loophole in the law at all he does concede:

“Der gemeinschaftliche Rechtsbruch kommt vor. – Indeed the Union does at times break the law.”

yet goes on to point out that council members have already firmly stated the opposite so it should be highly improbable (hmm …).

Second in line of German conservative dailies, Die WELT, cites ECB’s chief economist (EZB-Chefvolkswirt) Jürgen Stark as saying:

“Kein Land der Währungsunion haftet für die Schulden eines anderen Landes. – No country of the monetary union is liable for another’s debt.” (Translation CrisisMaven)

So let’s assume Trichet is not eventually going to leave his chief economist standing in the rain.

Will Greece default?

Well, in the long run, all <a title="Kim, Junga. “Domestic Institutions and Sovereign Default: Empirical Study on Debt Rescheduling Negotiations, 1980 to 1999″ Paper presented at the annual meeting of the American Political Science Association, Marriott Wardman Park, Omni Shoreham, Washington Hilton, Washington, DC, Sep 01, 2005 . 2009-05-25 ” href=”http://www.allacademic.com//meta/p_mla_apa_research_citation/0/4/2/1/5/pages42150/p42150-1.php&#8221; target=”_blank”>states that don’t have balanced budgets (i.e. no debt, with the exception of the occasional ways and means advance [Kassenkredit], but cancelling out over the course of each fiscal year) are, if history is any guide, likely to default, some earlier some later.

Why, as Erwin Grandinger the very same day writes in Die WELT as well, but about Germany’s budget situation:

“Der Staat kann nie alle Schulden zurückzahlen … Der Staat in seiner fiskalischen und finanziellen Grundstruktur steht am Abgrund. … Wir wissen aus der Finanzhistorie, dass wenn einmal die Bedienung der Schuldenzinsen über 20 Prozent des Bundeshaushaltes erreicht, der Staatskollaps nur schwer zu vermeiden ist. Wir haben es schon auf über zwölf Prozent gebracht, Tendenz stetig steigend. Und mit Personalkosten und Sozialausgaben landen wir bereits bei 75 Prozent. – The state will never be able to repay all debt … The state as it is structured fiscally and financially is on the abyss. … From financial history we know that if interest has reached 20 percent of the budget a collapse is nearly inevitable. We are already at twelve percent and counting. What with payroll and welfare rolls it stands at 75 percent.” (Translation & emphasis CrisisMaven)

serious thinkers are now aware that Germany, often touted as one of strongest economies may in the not so distant future be on the verge of default too.

So what are Greece’s debt parameters?

Greece’s GDP for 2009, according to the World Bank, was 356.80 US-Dollars, while the Euro area’s total GDP for 2009 was 13,565.48 US-Dollars, a mere 2.63%. Apart from that, as we’ve just seen, Europe, the European Union or the eleven Euro area member states are not responsible for Greece’s sovereign debt.

So what is all the fuss about? Nor is the European Union a federation of states as the Federal Republic of Germany is or the United States of America.

But not even in the case of case of California or Florida does anyone see a default directly impinge on the US Treasury’s creditworthiness, nasty as the situation may be. If Greece uses a common currency together with, say Germany, France or Spain that is issued by a separate entity’s central bank, so what? So do Zimbabwe and Ecuador. If Zimbabwe failed (and it has failed), would it drag down the USA? (However, there is a danger that not the currency itself will be harmed as much but all government debt denominated in Euros.)

Would the Euro zone break asunder if Greece defaulted on its debt? Would the Euro collapse?

Well, if the above analogies hold any water, then this would affect the Euro as much as the world would worry about the US-Dollar if California or Ecuador defaulted on their dollar-denominated debt.

However, there is a slight difference: all the members of the Euro area swore solemn oaths called the Maastricht Stability Pact. And it is this pledge that not only Greece has broken, but, by size of Gross Domestic Product, the vast majority of the (currently 16) Euro member states. It is perjury that doesn’t go down well in the eyes of civil society. It is the trust, and credit comes from Latin “credere” to believe, that has been squandered. Now that the Euro zone has violated its own sacred covenant of fiscal probity it stands before the world unmasked, its insincerity exposed, the delayed insolvency filing of most of its member states making matters even worse than if they came clean.

To state it most clearly: if Greece’s problems are dwarfed by the solvency problems of its virtuous co-members who now cry foul because Greece hadn’t fulfilled the criteria for joining the Euro while most of the other pharisees first joined sanctimoniously and then broke the code immediately afterwards, this hypocrisy makes it even worse; with that frame of mind none of them were allowed to join Alcoholics Anonymous!

And why do Europe’s creditors keep mum about anything but Greece?

It’s the same reason that China holds its breath about US debt. There really are only two reserve currencies in the world today: the US-Dollar and the Euro, which together accounted for over 90% of currency reserves held by other countries in 2008! Between them, the US and the EU have the rest of the world over a barrel. China and all the other creditor nations that hold large Euro and USD reserves, what can they do? They act like banks who extend more credit to an insolvent creditor so as not to have to write down their loans. They are all in the same boat and it’s called world economy.

When you’re in a boat together that’s taking on water, and all feel they’re the captain, who do they push around to bail the floating coffin out? When you’re in a boat together with no one still on shore, who do you expect to throw a lifeline???

Dear reader, I hope you can swim (or hide)!

P.S.: Or has Greece vanished already?

The Greek Embassy in London/UK lists several official links, among them as expected the Greek government’s official site “greece.gr”, however, the server is unavailable …

Forgotten to pay your domain registrar? Hosting fees have been impounded? Couldn’t quite understand the fine print? It can happen to any garage shop, and look what became of some of them! Good luck, Greece, cradle of Westerncivilisation!

Addendum (2011-06-22): Over the past several weeks, after a long break of being ignored almost entirely, this article now has been sought out about a dozen times a day by people hitting on it via search engines. This tells me that Greece’s default may be in its final stages. Does that affect the Euro when it happens? Now, yes, after a year and a half of foot-dragging, after EU politicians telling bare-faced lies and breaking all the EU covenants, after haggling about whether not paying back in time was a default or not (of course it is – any credit contract consists of at least three main elements: total amount owed, interest to be paid and … duration; imagine you go to your bank and ask for a loan, then … just keep paying interest but never pay back the principal – would they call that a technical default or not?). Greece need not even technically default now for the Euro to be a footnote in the history books in one, two or three years’ time. Will it last until 2015? I prophesy it won’t. Do I know what is to replace it? No. When you run out of fuel, then your car stops. That’s a sure thing. But where will it stop? Will you find fuel there? What make or brand? At what price? You would only know that if you knew the exact direction of where that car was headed and how much fuel exactly it still had and how fast the driver would go (which impinges on consumption per mile or km). So CrisisMaven says: no Euro by 2014 at the latest, because he believes he knows the maximum that tank can hold. What you’ll get in the Euro’s stead depends on who you hang on high to prevent being duped once again.

r Staat kann nie alle Schulden zurückzahlen

  1. Maurice Hazouri
    2011-05-05 at 16:03

    yay google is my king aided me to find this outstanding site! .

  2. Nieel
    2010-05-09 at 12:21

    Now to add insult to injury, the UK is stuck in a hung parliament?
    Like we really needed that right now just when Greece is about to be bailed out.

    Nevertheless, I do not see a Greek default.
    No single Euro country is opposing the bailout.
    A recent survey showed that most Greeks agree with the austerity measure.
    Portugal has planned to slashed its deficit further to 7.3% this year.
    And the Tories and the Lib-Dem are agreeing to form a temporary coalition to tackle the dire economic problems.

    All I see is a good opportunity for discounted Euro stocks, especially if you got a whole bunch of greenbacks.

    • 2010-05-09 at 23:16

      Hi Nieel, yes, despite it being unlawful no country opposes the bailout. So much for the Maastricht treaty establishing an area of law and peace. However, the bailout, whether 110 billion (milliards) or 800 billion will not be able to turn the tide. Britain, Spain, Ireland, Greece, Portugal and eventually all except maybe Luxemburg will default, whether now or in ten years.

  3. blue monkey
    2010-05-08 at 16:20

    Greece and Spain won’t pay back. The only thing Germans can do is:
    REPOSSESS 170 Leopard 2AEX Battle Tanks from Greece, and 190 Leopard 2A6E Battle Tanks from Spain.
    U.S.A must REPOSSESS 170 F-16 Jet Fighters from Greece, … the rest is gone with the wind …forever …
    Greece must stop paying lucrative pensions with borrowed money, reform the free health care system, and cut down, 4 times the military budged.

  4. rocio
    2010-04-26 at 19:42

    Thanks for your responses! I hope to read more!

  5. Nieel
    2010-04-26 at 11:50

    There was an article in the FT on the Greek problem.
    The problem is that Greece has a huge deficit far above that authorized by the EU.
    And there was 2 solutions:

    (i) Cut cost.
    (ii) Default on Greek bonds.

    To the first solution the problem was, nobody likes having their salary slashed or loosing their jobs, so if the Greek government was to cut cost it would lose all public support and eventually doom itself, in other words, political suicide.
    So it came to the EU that they could have to interfere with Greek economic policies, but interfering meant that Greece would have to surrender part of its sovereignty, a move unacceptable by the EU.
    Be reminded that unlike the US the EU is not a collection of states ruled by one government. Each member of the EU is independent of each other and intends to remain so.

    The second solution was quite simple default and no more pain.
    But a country of the EU defaulting also meant that the EU would allow other countries to default. The first domino would cause a massive downgrade of European bonds, economic suicide for the EU, and the blunt cost would have to be paid by those who were careful with their monies.
    So, bailout?
    Yes, the EU had to set an emergency fund to help Greece, but some member would not agree,especially the bigger ones like Germany, who would have to shell the bigger part.
    Of course, not to forget the “he got bailed out why can’t I get bailed out too?”

    If not the last resort was to go beg at the door of the IMF, quite pathetic, is it not?

    It all comes down to this 3 way dilemma, admit that the EU should have been set up, force good EU nations to pay for the stupidities of others, swallow your pride and beg at the IMF.

    In all 3 cases the result was the same, EU = Bad Idea.

  6. rocio
    2010-04-25 at 17:44

    o the most important question I left out, how will this DIRECTLY affect the value of the EURO?

    • 2010-04-25 at 18:14

      If I’ve learned one thing in over thirty years watching currency exchange moves it is that they are nearly unpredictable at least short and mid term. In theory Greece, if it’s bailed out or if it’d default would have as little effect on the Euro as California’s looming default would have on the US dollar. However, it would raise even more questions about the intelligence of people like Trichet and the founders of the Euro and that will likely not be a good influence. However, since Bernanke and Greenspan are every bit as intelligent as Trichet these effects may very well cancel each other out. That’s why currencies are different from stocks or bonds – there’s always those other currencies that move also. So to get a direct measure of the Euro’s ups and downs, watch how it depreciates in gold equivalent. Not that this will always be predictive, but at least it’s manifest.

  7. rocio
    2010-04-25 at 17:40

    This helped me understand more about not just the Greek economic crisis, but more so as you state, underlying EU moral issues, ethical conduct, and responses to the Greek economic crisis. However, is your conclusion the following: If Germany or other EU states don’t back Greece in this one, Greece will collapse and the EU could lose “credit.” And if Germany or other Eu states do back up Greece, then they will later suffer the consequences and with some nations facing future prospects of collapsing, aiding Greece would only add to future problems. So why bother? But that’s just an excuse!

    So … is the underlying intention or thought the following: Let Greece collapse, who cares! If and when they do, the country will be usurped by another, like most third world countries. And if the latter is the case, is it a win for Germany, well at least, a better alternative than facing default.

    And two questions:
    Why is Germany, at least in your opinion, the only EU state being pressured to support Greek economic recovery? I have read in the nytimes the EU (which as we all know comprises of other countries) extended their hands to Greece, but Greece for a while sought other alternatives (not sure which ones) and is now considering taking the bail but not after putting a fight over the interest. I’m confused not only about Germany’s leading role, but over the roles of other EU members.

    Gosh let me conclude.



    • 2010-04-25 at 18:08

      Hi rocio, all EURO zone member countries are participating in that Greece bailout scam “equally”. Germany is only the most prominent as it is the biggest ECB shareholder. Each of the others will chip in according to their share. The focus on Germany though is because without the German lion’s share the whole thing would collapse. (There was a sidetrack about indemnifying Greece for German World War II Nazi atrocities but that didn’t have any influence it was just populist rhetoric like politicians love to do.)

      • rocio
        2010-04-26 at 04:00

        Wow, thank you!
        Do you think Greece would have been better off sticking with their former currency?

        • 2010-04-26 at 11:43

          That’s a tricky question. Ask whether an anorectic who refuses to eat would be better off at home or in a clinic – she’s going to die one way or another, only the clinic is more expensive. “Going Euro” also will be more expensive as it affects others more than keeping the drachma would have. However, that said, the obvious answer is: let the markets decide what they choose as their currency and don’t make legal tender laws, abolish central banks. That way at least the harm inflicted stays with the people making their own choices rather having them made for them. Or, if you nationalise currencies, then please do so with bread and butter, cars, and health care too (oops, the latter is already …). Only to find that after the collapse there’s no one sending aid, as there’s no “outside capitalist” world there to help, send CARE parcels or food aid. That’s the current situation world-wide and the Greek, the Spaniards and the Portuguese are just only a bit more hot-blooded than, say, the Swiss.

  8. 2010-02-23 at 10:42

    this is a nice blog. You can also find more information about stock tips here

  9. Con
    2010-02-19 at 22:43

    It is the typical attitude and thinking of another previous comment I have read by the name of “George” that has brought Greece to its knees. The Greek elite were born and died in ancient times. The modern day Greeks feed on the earned fame of the ancient Greeks and have offered nothing further to that offered by their ancestors. In today’s Greece one in 3 persons is employeed by the Goverment with a fair number without just or qualification. Only for the purpose of political parties to secure their votes. Who pays their salaries?
    Answer: The rest of the people working in the private sector together with loans every year increasing sovereign debt. Governments with zero planning or responsibility. Guess what! Time has RUN OUT.

    • George
      2010-02-20 at 09:07

      The funny thing is that, even if you have no idea what is happening within Greece today you publish nonsenses. Where did you find that 1 out of 3 are public servants? Greek population is 12 million and people working for the Government is 650,000. Still a great number but not even close to what you say. On the other hand you involve the ancient Greeks to prove what? By the way, why dont you post your origin?!Or are you ashamed to say? I die to know what is the perfect country you are living in!

  10. George
    2010-02-13 at 22:15

    A comment to the author: – Why do you discredit the Greek civilization? First, you have to learn how to write the word “civilization” correctly. Secondly, if the Greeks would not exist, you would still be eating raw meat and live in caves.-

    • 2010-02-13 at 22:36

      My dear George, assuming, from your reaction, you are a Grecophile US-American, let it be said, that the United States’ citizens (with a “z” even in British English!) fell in love with the “z” where for centuries the “s” sufficed. Rest assured, I do not discredit Greek civilisation, rather I chide today’s Greeks’ uncivil behaviour (with a “u”). I do indeed know the Greeks for what they’re worth: one of my children is Greek … 🙂

  11. Nieel
    2010-02-12 at 13:15

    Honestly it is not the subsequent devaluation of the Euro that I worry about, but rather the default itself, and its consequence for investors; and when I say investors I do not mean rich guys like Warren Buffet but Pension Funds and the other important financial entities that hold a substantial amount in Greek bonds.
    A default would have quite significant repercussions across the whole world, doomsday sayers would even prophetise another recession for the euro zone.

    But seeing how the Greek government is handling the situation, I’m very skeptical that they will be able to get out of this mess by themselves.

    So far the best solution would be an “constitutional and economic” intervention by the other euro economic super powers but that would mean Greece surrendering its sovereignty and become a b!tch to Germany and such.

    Another step towards Hitler’s unification of Europe?

    • 2010-02-12 at 14:07

      The problem to me seems that if Germany or others help out it will deteriorate their rating, if they don’t it eqally will, so … take your pick 🙂
      There is no real alternative tio fiscal probity, only you have to start about sixty years earlier …

  12. 2010-02-11 at 20:08

    One might as well spell it out and call a spade a spade: the EU has been created to “emasculate” the nation state as an institution and to put itself above and beyond the European nation states.

    Money rules the world, and the ECB governs the creation of money in the form of Euros… People can’t care because they don’t understand the issues at stake. We’ve been numbed and dumbed. These “wonderful” American textbooks, as one French economic site wrote…


    But the Robin Hood Tax has been launched as a positive solution! Ten years after the Tobin Tax was at the heart of foundgin ATTAC. What better branding and timing!

    Which politician can afford to be against the Robin Hood Tax???
    See http://bit.ly/9fNURo for more.

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