Is Greek Bankruptcy Assured?

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Includes: FXE, IGOV, VGK
by: Zecco

By Paul Quintaro

Speculation over the possibility of a Greek bailout has raged for the entirety of the summer.

Many market commentators have stated that the Mediterranean country would be forced to default, as its debt levels had far succeeded the country’s ability to pay.

Some critics alleged that embracing the painful austerity measures designed to get Greece’s government spending in line would actually only exacerbate the problem.

Under the austerity plans, Greek public workers were laid off en masse as budgets were slashed. Likewise, taxes were raised and efforts to collect back taxes were accelerated, perhaps furthering constraining the economy.

Those fears may have been realized on Sunday, when the Greek government admitted that its deficit for 2011 would exceed expectations—coming in at 8.5% as opposed to the 7.8% that was anticipated.

Further, the Greek government stated that it would be unable to meet its obligations by the middle of the month without foreign loans.

Will the rest of Europe leave Greece to hang, or continue to extend additional monetary support?

Last week, the German parliament voted overwhelming to approve additional aid to Greece. Had that vote failed, the bankruptcy of Greece could have become inevitable.

Some doubts were raised that Germany would pass the vote, as political opposition to the bailout of Europe has increased in recent months. Earlier in the summer, a group of scholars challenged the legality of Germany’s bailouts of Europe in German court, alleging that they violated Germany’s constitution.

As was widely anticipated, that challenge failed.

German lawmakers and courts may have realized the ramifications of the failure to pass a Greek bailout. Greek debt is widely spread among the financial institutions of Europe, and a Greek default could trigger a full-scale financial panic in the eurozone.

Meanwhile, Germany’s manufacturing sector may be benefiting from a weak euro. If the euro’s weaker members were to leave the union, the euro may appreciate significantly, which could put a damper on German manufactured goods, as those goods would appear to go up in price to foreign consumers.

Still, no matter how strong the will is to bail out Greece, the means may simply not be there.

Last week, famed investor Warren Buffett admitted that European banks had asked him for money. At the same time, on Monday morning, credit default swaps for Germany soared to an all-time high.

With the core now seemingly reeling, the possibility that Greece could be bailed out seems increasingly less likely.

Should Greece go bankrupt, it could have tremendously negative consequences on the euro. The EUR/USD pair traded lower on Monday, near $1.32, as the U.S. dollar index rallied almost 0.5%.

Does the euro continue to trade lower, or rally back? The value of the euro may ultimately rest on the ability of Germany to bailout Greece.