The recent Grexit rhetoric is not restricted to German officials, but to all European politicians across the board. My guess is that a lot of it has to do more with internal consumption politics in many European countries than with reality.
To try to make you understand why a Grexit is next to impossible, let's think about what will happen if Greece is actually kicked out of the European Monetary Union (EMU).
Aside from the legal issues, if Greece is indeed kicked out of the euro, that means that the deposits in euros which Greek citizens have in Greek banks will have no value. Actually, they will have some value, but not the current value of the euro.
This also means that if another country were to be kicked out of the euro, then the deposits of that country's citizens will also be worth something other than the euro's current value. In both cases, the value of the deposits will be worth a whole lot less.
As you understand, if Greece were to indeed be kicked out of the EMU, then that would set a precedent and that would mean that other countries, under certain circumstances, would also be able to be expelled. So if Greece gets kicked out, my hunch is that we would see a bank run of historic proportions all across Europe.
Which means that the euro would collapse, because depositors and investors would be running scared, speculating who will be next, probably buying dollars in the short term. In any case, I foresee a massive exodus from the euro across the board, including investors and depositors in Germany.
But suppose, for the benefit of conversation, that Greece did get the boot from the EMU? How will that fix the situation in other countries that have similar problems as Greece? Will a Grexit fix the banking insolvency of Ireland, or the problems in Spain?
Furthermore, how will kicking Greece out of the euro benefit Europe? The answer is, it won't. Not because Greece is of some financial importance and carries great weight in European matters, but because it is the fuse that will ignite a barrel dynamite in a room full of high explosives. And that will actually blow the European Union up.
I think it is actually cheaper for Europe to take an additional €150 billion loss on Greek sovereign debt (code name OSI), then have Greece fall into a disorderly default. If Greece does get kicked out, then it is more than sure it will default 100% against everybody. In this case, the losses for Europe will be far north of €500 billion.
There have been many figures estimating that a Greek exit will cost as much as 1 trillion euros. Actually, between bank runs, financial chaos, equity losses and the damage done to the euro -- not to mention the fact that the entire European banking system will collapse overnight -- I personally think the cost will actually be much higher than one trillion euros. I think the total damage will actually be several trillion euros.
Yes, Greece is a basket case, and there are many things wrong with the country as a whole. Yes, it will cost money to keep Greece in the euro. Yes, Greece will need a mini Marshall Plan to get back on its feet. And yes, European investors will take another hit because Greece needs additional debt relief. However, the cost of kicking Greece out of the European Union will be many times higher than the cost of keeping her in. Anyone who thinks otherwise. either does not know the facts or does not understand how markets will react.
So European politicians can continue the rhetoric of how Greece will be kicked out of the euro, but the facts are that isn't an easy decision, and it should not be made hastily. Not because European politicians don't want to see Greece be forced out of the EU, or that they feel sorry for Greece, but because a Grexit not an economically feasible solution for Europe itself.
Having said all this, just because the euro will not break up (as many believe), does not mean that it is safe to go out and stock up on shares in European banks. That's especially the case for Greece, where several banks have already been liquidated and delisted from the Athens Stock Exchange. I firmly believe several others will follow.
For those considering National Bank Greece SA (NYSE:NBG), Alpha Bank A.E. (OTCPK:ALBKY) or EFG Eurobank Ergas (OTCPK:EGFEY), I would wait to see what the total dilution to shareholders will be when European authorities recapitalize these banks. Before that happens and before we have a clear picture of the capital increases and the dilution situation, I don't think it's worth the risk. As for Bank of Piraeus (OTC:BPIRF), even though the stock is trading for pennies, I don't think we have seen the worst. The same applies to TT Hellenic Postbank SA (OTC:TTHPY).
I would, however, consider buying, INTRALOT S.A. (OTCPK:IRLTY), Coca-Cola Hellenic Bottling Co. (NYSE:CCH), Motor Oil Corinth Refineries (OTC:MOHCY), Titan Cement (OTC:TITCY) and many other Greek stocks that have a good international exposure.
Additionally, I would also not go long Deutsche Bank (NYSE:DB), Commerzbank (OTCPK:CRZBY) or any other German bank, for that matter. Besides the leverage issue in German banks and the fact that I don't trust the quality of the assets, the potential for additional losses on sovereign debt write-downs, Greek or otherwise, is just too great. The same applies to the French banking sector, including, but not limited to, Societe Generale (OTCPK:SCGLY), Credit Agricole (OTCPK:CRARY) and Bnp Paribas (OTCQX:BNPQY).
In fact, given that Greek banks have almost gone to zero, the German and French banking sectors will probably continue to be a good long term short play until the bad assets have been written down and capital ratios are such that we're given the "all clear" to go back into the European banking sector.