Greece And The Euro Will Live On

Includes: ERO, EU, EZU, FXE, IEF
by: Randy Lacen

European governments are now struggling to find a way for Greece to stay within the euro currency. Numerous attempts by the German government in 2012 to quell the euro crisis, set in place default measures for Greece to brace itself for an orderly default within failing debt markets.

Certainty within the European financial market system has brought on $430 billion dollars of extra contributions to the IMF including $200 billion dollars from the eurozone, $60 billion dollars from Japan, $15 billion from South Korea, $15 billion from UK, $15 billion from Saudi Arabia, $10 billion from Sweden, $10 billion from Switzerland, $9.3 billion from Norway, $8 billion from Poland, $7 billion from Australia, $5.3 billion from Denmark, $4 billion from Singapore and $1.5 billion from the Czech Republic. New elections in Greece are on the horizon, as the contemporary government coalitions in Greece have failed to secure the necessary confidence votes from the Greek population, a move that can necessitate snap elections as a public angry with swinging austerity measures reject current bailout agreements.

The European Union is now up against the wall and has to make the right call whether to re-negotiate the contract terms of the EU/IMF bailout with Greece, or to go ahead and expel Greece from the euro currency. Greece leaving the euro currency should not be an option for the country. Direct democracy in Europe calls for a form of government in which people vote on policy initiatives directly, as opposed to a representative democracy where people vote for representatives who then vote on policy initiatives. A referendum in Europe, thereafter, calls forward a direct vote in which an entire electorate is asked to either accept or reject particular proposals. This results in the adoption of new constitutions, new constitutional amendments, laws, and/or the recall of an elected official or specific government policy within the eurozone.

Bond investors continue to support the ECB, as Spain has just announced a €27 billion euro austerity program amidst painfully high unemployment in Spain and a liquidity crunch encompassing the Spanish banking sector. Investors are concerned that the nation may not achieve its fiscal targets this year. Investors are increasingly worried that Spain will struggle to meet its 2012 budget deficit target as the nation's economy is expected to shrink 1.7% this year, and such pressures on yields would undoubtedly revive the scenario in which Spain may become the forth eurozone country to receive EU assistance. This renewed tension has raised major speculation that the ECB could resume its controversial purchase of sovereign bonds.

The fiscal compact, first announced in December of 2011, is now under fire by anti-austerity protests across the euro area. The so-called fiscal compact includes a "balanced budget rule" that requires governments to keep deficits below 0.5% of gross domestic product. Those that break the rule will be subject to an "automatic correction mechanism," which has yet to be defined. This pact, however, needs to be signed by the parliaments of individual EU governments. The fiscal compact agreement will only be legally binding after the pact has been ratified by 12 EU member states (out of 27) and then incorporated into EU treaties within the first five years. Greece has already ratified the fiscal compact and set its vote on the fiscal compact, but a second round of voting for Greek parliament in June may stir enough influence to overturn the prior ruling on the pact and force Greece to adopt a constitutional amendment to the existing EU bailout terms.

Private investors and the ECB, ultimately, stand behind Greece struggling to remain in the euro currency. The ECB holds massive quantities of Greek government bonds at the moment that were not subject to the haircuts placed on the private sector. It is said that four different payments are due under these outstanding bonds this year, as Greece is now suspected of imposing a moratorium on the ECB. What could the ECB do if Greece were to impose a moratorium on the ECB, you ask? No real crisis should occur, if Greece imposes a moratorium and the ECB does nothing. The ECB does not need euros from Greece to finance current market operations. The outcome seems more likely the ECB simply continues to provide more liquidity to Greek banks, while the ECB attempts to end the moratorium through future negotiations. The premise is straight-forward. The costs of a Greek exit are not only immense for Greece but also immense for the eurozone, the ECB, and other official creditors. Talk of a Greek exit strategy from the euro currency could never be smoothly managed without collateral damage and investors are now calling out the bluff.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.