Politicians are finally discussing what the markets figured out years ago - that Greece can't stay in the Euro.
From the monetary fortress of the European Central Bank to the pro-European duchy of Luxembourg, policy makers are beginning to air their doubts that Greece can stay in the euro...Already the Euro zone is debating witholding bailout funds from Greece. Greece has long since been locked out of the private debt markets. Without those funds, Greece can't pay its workers, and thus has no other choice but to leave the Euro.
“Politically speaking, Greece is already out of the euro zone,” Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, said in an e-mailed note. “The only question is about the timing and disorderliness of its exit.
It was only last October that the idea of a country leaving the Euro was considered almost impossible.
European treaties label the euro ‘‘irrevocable’’ and provide no legal procedure for a country to leave or be thrown out. A December 2009 study by the ECB’s legal department deemed an ouster or departure ‘‘so challenging, conceptually, legally and practically, that its likelihood is close to zero.’’The dramatically split government in Greece will inevitably lead to more elections. In the meantime, it is unlikely that the government will be able to agree to anything important in the coming months, including more austerity measures that German political leaders are demanding.
Europe’s crisis managers put the odds at zero until last November, when German Chancellor Angela Merkel and French President Nicolas Sarkozy turned a planned Greek referendum on austerity into an in-or-out vote on Greece’s euro future.
That means that several bailout agreement deadlines will not be met. Other European leaders are saying that renegotiating the bailout is not an option.
So where does that leave us? With Europe cutting off funding to Greece, and Greece having no choice but to leave the Euro and go back to the Drachma.
How will that work, especially with so much of their debt priced in Euros? I have no idea, but it won't be pretty. Major banks in France and Germany will take it on the chin, and Wall Street banks who insured that debt also losing money. Some of them will need to get bailed out, and that won't be popular with anyone.
There is also another looming problem: Spain.
Prime Minister Mariano Rajoy said the debt agency is the only borrower left in Spain that can finance itself on markets as banks, companies and regional administrations have been shut out.Spain's Treasury may be the only ones who can borrow these days, but their borrowing costs have just reached 6%, which is the level that Ireland and Portugal reached before needing to be bailed out.
"Today, the Treasury is practically the only one that finances itself on the markets," he said in the Senate in Madrid today. Being locked out of debt markets isn't "theoretical" as it's "happening to the immense majority of regions, our whole financial sector and most big companies."
Rajoy once again raised the threat of an international bailout as he seeks to convince Spaniards to accept spending cuts even as unemployment approaches 25 percent. His comments also underline the challenge the government faces as it tries to overhaul the banking industry without overburdening public finances.
On top of that, Spain is expected to miss its budget goals, thus violating the same agreement that the EU is crushing Greece with.
The reason for this upsurge in problems in Spain is the costs associated with a banking sector bailout that has just begun.
So where does that leave Europe? With a world of problems.
Spain's economy is the 4th largest in Europe. They can't afford to bail it out like Portugal, or let it exit the Euro like Greece.
But when Greece defaults and leaves the Euro, that will trigger fears in the market that are likely to further punish Spain.
Greece's future is somewhat obvious. Spain's future is much harder to predict, and that complicates predictions of the future of the Euro.
Most likely the Euro won't go away, but it has no chance of continuing to exist in its current form.