“Greece – A Line in the Sand?”

By Bruce Krasting, a former foreign exchange and derivatives trader and hedge fund manager.

On December 10th I raised the possibility of Greece breaking the connection with the Euro. On the likelihood of this black swan type of event happening I said, “This is not a high probability outcome.” A week later the possibility of a realignment of some sort is still remote. But it is a tad closer.

On December 11th Steve Barrow at the Standard Bank, London wrote a piece that raised the issue of both Greece and Ireland doing something with currencies to assist their domestic economies. Steve clearly has more visibility than I do. His thoughts got to the Finance Ministry in Dublin who responded with, “Uniformed comment”. The Greek FM was very clear on the topic. “No chance Greece would leave”.

This is a risky development. The Central Banks have put a line in the sand on this. That is always a mistake. When a CB says, “Such and such will never happen” you are going to get people (like me) saying, “Oh, really?” The very fact that they are saying, “that is rubbish” just fans speculation.

Greek PM Papendreou proposed a cutback in 2010 expenditures to 8.5% of GDP (down from 12.7%) as a way to instill confidence. For me that is, ‘rubbish’. It will not work. If cuts like that are made there will be social consequences. That instability will just fuel the sovereign ‘flight risk’ issue. This problem will not go away with just that proposal on the table.

The Central Banks have drawn a line in the sand for good reason. They do not have a choice. The countries that are at risk have issued mammoth amounts of debt in Euro’s. If some form of two-tiered Euro were the result the cost of revaluing the debt for both the public and private sector would be devastating.

The flip side is that the countries that are suffering have no policy options available to them. They can’t provide a meaningful stimulus because of the Euro link and limitations on budget deficits that the link mandates. At some point this will become untenable. The argument that a two tiered Euro would stimulate both the tourist and industrial economies of Greece, Spain and Ireland (Italy too) becomes compelling.

I don’t see a soft landing. At an extreme where could this go? It leads to global financial instability, it could be very deflationary. Precisely what the global economy does not need. Greece is a bit like Sub Prime. By itself, it truly was containable. But it exposed other weaknesses. If one was looking for something to upset the applecart, Greece could very well be it.

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  1. Hugh

    This raises an important point. People talk about a flight from the dollar, but what this overlooks is that there aren’t a lot of others places it can go. China continues to have its great capacity overhang. Japan is stagnant. The Eurozone is rife with unaddressed problems that are as much political as economic. I am not a goldbug. I think gold is an extraordinarily easy haven for governments to freeze up anytime they want to. In any case, Greece just underlines the weakness in the world economy. It is like the Titanic. Except for the sinking part, it was a great ship.

  2. Trainwreck

    LMAO Greece should worry about being kicked out of the EU. When Germany decides its in it’s best interest to promise Greek debt, then perhaps we should entertain the idea that the USA will promise the debt of Caly, Arizona, Nevada, NY, ect. Maybe, but I doubt it.

    1. Bruce Krasting

      Yes it could be a disaster in the works. Look at the Euro this morning. How much of that price move is a consequence of the S&P decision yesterday to drop Greece to BBB??

      Euro weakness could be the predominant result of the Greece issue. A strong dollar will just kill America.

      Is Greece, by its self, a black swan? No. But it starts and keeps the money moving. If it starts something that extends to Spain Italy Ireland then it will be a black swan.

  3. anonymous

    You had me until

    “It leads to global financial instability, it could be very deflationary. Precisely what the global economy does not need. ”

    There isn’t any other way out of this other than wringing the excess credit out of the system, and that will produce deflation.

    Arguing that prices need to be maintained because there’s a massive amount of leverage is kind of like putting the cart before the horse, no?

  4. Tortoise

    In my humble opinion, the EU should not help Greece. This is not because I am anti-Hellenic. Au contraire. Greece is a country that needs to deal with its own problems and, in a metaphorical way, grow up and behave like an adult. Promising Greece help at this stage enervates the progressive forces within Greece that push for real economic and social reforms. It is like giving more opium to an addict. What Greece needs from its partners is some tough love.

    I am confident that the Greeks will rise to the level of whatever challenge they have to face, perhaps kicking and screaming all the way but at the end happy with the results. Greeks at large now are the first victims of their disorganized, inefficient, and corrupt state machinery. They will be happy to see it changed but change cannot come without a major crisis.

  5. bb

    “Greece and Ireland doing something with currencies to assist their domestic economies”

    that sentence alone shows the grasp of understanding of the matter by the author.

  6. Kosta

    This Greece brouhaha is not the beginning of the end of the Eurozone, no it’s a chance for Greece to move forward. This is not a crisis, it’s an opportunity (and a somewhat manufactured one at that).

    Yes Greece has a bloated civil service, large unfunded pensions, poor tax collection, far too much corruption and poor fiscal strength but the 12.7% projected deficit/GDP overstates the problem. PM Papandreou came out with this number after winning an election where previous PM Karamanlis was projecting a 3% of GDP deficit. Why such a discrepancy?

    Undoubtedly Karamanlis was being overly optimistic in his 3% estimate, but do you think the deficit was knowingly or unknowingly underestimated by 420%? No Papandreou has seized the moment to project the worst possible deficit to generate a crisis and give his gov’t the impetus to enact much needed reforms (a kitchen sink earnings release of sorts). Germany and the EU are doing their best to help Papandreou maintain the atmosphere of crisis in Greece, so that his gov’t can start paring back their civil service, curtail future commitments (like pensions), improve tax collection and act on the corruption that pervades Greek society. The EU will support Papandreou in his efforts, and there is very little chance for this country to leave the Euro.

    Will there be pain in Greece? Absolutely, but that pain is inevitable. But it’s not a crisis, it’s an opportunity for the country to get it’s fiscal policies in order.

    1. Albatross


      I would agree with your sentiments but the question is would the Greek public agree a drastic budget cut?

      From the street protests, it does not look very promising I must admit. What do you think?



      1. Diego


        the Greek public can protest all it wants, but the government has the power to enact reforms, and the government has 4 full years to show the public that it was the right thing to do.

        Moreover, I think the silent majority in Greece does not back 15-year-old self-defined anarchists throwing rocks at the police.

        1. Albatross

          Well, we’ll see. We are increasing our voices and anger towards US govt and major figures in the U.S. Greece is lucky, I’ve just watched Prime Minister of Greece (Papandreu) speaking and he made sense.

          I don’t think the big boyz of EU (Germany and France) would let Greece down now, but then again what would they do when other members of PIGS join the party and Austria, and perhaps some Eastern European countries.

          All I’m seeing is telling me that this EU credit story is far from over.

      2. Kosta


        Greek politicians (although corrupt themselves) have been aware of the need for deep structural reform for quite some time, but the last gov’t (Karamanlis) was unable to enact any measures in part because of the divided parliament. Papandreou has a majority now, and politically he can effect change.

        I agree that many parties in society will not like the changes that Papandreou will put forth, and undoubtedly there will protests and strikes. But Greece is in a “crisis”, which give Papandreou the opportunity to move forward. Germany and the EU will support Papandreou in whatever austerity measures he puts forward. If the Greek populace doesn’t like it, Germany and the EU will make noises about punitive actions against Greece (I doubt they’ll go so far to threaten Greece’s expulsion). But that threat is the club by which Papandreou can fend off public protests.

        It also helps that the leftist PASOK is in power, instead of Neo Demokratia. Cuts to the state’s budget will undoubtedly upset the left-of-centre vote. But where will they go? It’s hard to imagine Neo Demokratia picking up the socialist cause and attracting them, and the KKE is far too far left to play a major role. If you look at other democracies who have balanced their budgets by cutting social programs, it’s usually the party on the left that does the cutting (for instance Clinton the Democrat cut welfare in the 1990’s, but Bush Jr. couldn’t touch social security).

        The next couple of years won’t be easy for Greece, and yes, there will be protests. But this debt crisis is an opportunity for Papandreou (and the EU) to put Greece back on sounder financial footing.

    2. Peter T

      Kosta, this is an interesting thought. What Germany and the other financially strong countries in the EU want are significant actions against the deficits by Greece and the other weak contries. I don’t know Papandreou but you might do, and, maybe, he is indeed creating the crisis that “should not be allowed to go to waste” (R.E.).

  7. Daniel de Paris


    I cannot talk for Greece. And would be far more circonspect. But overall countries are certainly not equal in front of debt.

    I do not buy the scheme for Ireland. This is ridiculous IMHO. And that is enough to challenge the author’s writings. This bank is talking their currency-speculation books.

    Ireland is on its way out. Painfully so. But it is. Its population is YOUNG, cohesive and can, collectively, cope with rough times. Tight budget conditions and horrendous financial conditions as well. No need for tough love. They will stand to EC requests.

    I’m sorry that I have to say that. But it has to be:
    “beeing an Englishman does not help in assessing Ireland.”

    1. BigBadBank

      “beeing (sic) an Englishman does not help in assessing Ireland.”

      Bruce Krasting is not English.

  8. Diego

    I agree completely with Kosta.

    When something is absolutely necessary for a EU country, the only way locals will accept reform is when Brussels tells them to do so. That’s what’s happening with Greece (in a manufactured crisis, as Kosta says).

    The same went for market-opening reforms, stopping subsidies and privatizing state-owned companies in the 80s and early 90s, reducing public deficits in the late 90s, and even in some non-economic areas (such as university education) with European-level reforms (Plan Bologna).

    In fact, I’m looking forward to the day when a crisis is manufactured for my country (Spain) and Europe tells us to implement the reforms everybody knows are necessary (e.g. labour-market reforms).

    1. charcad

      I’m looking forward to the day when a crisis is manufactured for my country (Spain) and Europe tells us to implement the reforms everybody knows are necessary (e.g. labour-market reforms).

      I believe you. Dictatorships are always inaugurated with thunderous and enthusiastic cheering.

      1. Diego


        Brussels does not impose reforms. Reforms can be only recommended from Brussels.

        The thing is: many EU countries (including Spain) have enacted hard reforms only when they have been proposed or incentivized from Brussels. Experts from Brussels are considered to be above national politics, so the typical ideological confrontations don’t occur.

        If something is really, really necessary and unavoidable, the country won’t get together til they hear Brussels’ voice.

  9. Vinny G.

    We spend lots of time in Greece and will likely retire there or Cyprus. But I must say, Greece really does not have much to show for after 35 years in the EU. In some areas, you might as well be in the Middle East. Greece has by far the worst infrastructure in all of the EU, some of the worst environmental problems, and lowest salaries (although in fairness, they get paid what they deserve, considering the length of their siestas). Most of the Eastern European nations that joined the EU in recent years, such as Hungary, Poland, or Romania have surpassed Greece in almost every regard (except amount of sunshine per square meter).

    I think that to move forward Greece needs to become more European, like Cyprus at least. 

    But I don’t think Greece has the option of leaving the Eurozone or the EU.  It is a small country and I think Germany will bail it out. It has a strategic position and the weather beats Berlin’s. Also, considering it’s so small and the standard of living is so low, it would be a cheap bailout, by comparison to say Spain. 

    And, btw, should deflation hit Greece, there are plenty of sun-starved Russians ready to invest. In fact, with Greece, the Russian investments are very important. 


    1. Diego

      You are lucky: today I feel like feeding the troll :-)

      1) Greece has a GDP per capita (in PPP terms) similar to those of Italy, Spain, Japan and Germany.


      2) Infrastructure is not everything, especially so when infrastructure upgrades don’t put advanced European countries closer to you.

      3) All this “Greek tragedy” is no more than a stupid, fabricated financial scare magnified for political purposes (a new government wanting to implement hard reforms).

        1. Diego


          Iceland and Ireland keep on leading all 4 of them.

          Moreover, since the onset of the crisis, Germany’s and Japan’s economy have fallen much deeper than Spain’s or Greece’s. I can’t see your point.

  10. maynardGkeynes

    Though unlikely, the departure of any particular country from the euro could hardly be considered a Black Swan. It has been the question hanging over the euro from the beginning, and will always be.

    1. Diego

      There’s no way a country can leave the euro. Economically and monetarily, it would be a huge disaster; interest rates would shot up to Third-World levels, as would inflation; foreign investors would take all their money ASAP from that country; all international agreements in euros with that country’s companies would be immediately terminated, etc. etc.

      The departure of any particular country from the euro is slightly less probable than Red America’s leaving the dollar.

      1. Bruce Krasting

        No way a country can leave the Euro? Are they in prison for life? They have lost the right to improve their own destiny? They are slaves to Brussels? While I have suggested that this is not the “high probability” outcome it is wrong to say there is no chance.

        The chances get higher every day. A friendly wager. 10 Euro. Greece has broken the Euro link by 12/17/2010. We on?

        1. Diego

          They’re politically free to do so; they can’t possibly do it just because it’s no sense. I mean, every country is free to abolish money, prohibit banking or terminate automatically any contract prior to a mentioned date. But there’s no point in doing it.

        2. BigBadBank

          Done. I agree with Diego – although not the ‘English-speaking’ bit – and I will take that bet. €10 to any charity of winners choice if Greece has left or is seriously planning to leave the Euro in a years time.

  11. Bruce Banister

    Hey Bruce, I will take that bet just for the hell of it. I actually agree with you but, it may take them more than a year to get out of the euro.

    1. Diego

      Why would anybody want to leave the euro?

      I can’t believe the English-speaking public can be so uninformed about this important issue.

      1. charcad

        I can’t believe the English-speaking public can be so uninformed about this important issue.

        It may be you are correct that no country in the euro monetary union will ever leave for the remaining time span of the Universe. You should know that your tsunami of fulsome denials stirs other suspicions in the English-As-A-First- Language speaking public:

        “Methinks the lady doth protest too much.”

  12. Bruce Krasting

    Ok Mr. Banister you are on. I have marked my calendar and made note of your email. I actually think I will lose this bet. At least I hope I do. If this happens fast it will be very messy. It could end up being the most expensive bet I ever won.

    Diego: No one wants to leave the Euro. The better question to ask is, “can Greece afford to stay??”

    1. Diego

      How would anyone not afford to stay in the euro, be kicked out of the euro or otherwise be better off out of the eurozone?

  13. ZA

    So they drop the euro and declare drachma 2.0 the new currency so they can join the international currency race to the bottom.

    So what keeps traders from slaughtering the new currency from the instant it starts trading?

  14. Bruce Krasting

    I think the idea of Drachma, Peseta,Punt,Escudo or Lira 2.0 is not in the cards. If something happens it would be a two tiered Euro. The difference between the two would be set by the market. The strong Euro would appreciate against the dollar. The weak Euro would fall, My guess is that a 20% adjustment would solve a lot of problems. The strong Euro countries could handle this. The weak ones would benefit from it.

    This is the EU, not America. Do not make the comparison to California. Californians are Americans. Greeks are not French or German

    1. Diego

      Greeks are not Germans. Californians are not New Yorkers.

      Californians are Americans. Greeks are Europeans.

  15. Diego

    I’ll repeat the question, since nobody seems to have taken the time to think about it:

    How would anyone not afford to stay in the euro, be kicked out of the euro or otherwise be better off out of the eurozone?

    1. charcad

      Look up “Nord Stream”. Then ask yourself what Club Med does for the Teutonic North compared to that.

      What does Germany get out of carrying Club Med economically? This looks very much like a one-way trade. I’m sure it looks great from your viewpoint. Free money from someone else always is.

      1. Diego

        The Teutonic North does not carry Club Med economically in any meaningful way. Having a single currency brings stability to all member states.

        Just some years ago, it was Germany who was breaking the deficit ceilings and who was paying a higher interest on its public debt than Spain.

        When a country experiences hard times, being part of a community helps, no matter whether you are Teutonic (?) or Med (?). On the other hand, Spain and Italy are net contributors to EU funds (they pay more money than they receive), and those transfers, mainly to Eastern European countries, help mainly Germany (just a matter of closeness).

        So everyone has benefits.

  16. jon stanley

    Very simply Greece has punched above its weight for a long time now. The illusion of stability afforded by the Euro has allowed both deficit spending and consumer borrowing to expand far in excess of what could be achieved with Greece’s own credit rating. Th recent credit downgrade is to be honest simply the market regrading Greece’s creditibility more honestly.

    Anyone remember 1993 and our exit from ERM….I wonder how many Hellenic government bonds are being hoovered up by Soros at present?

  17. Sean

    Your quotation about the Irish Finance Minister made me laugh.Heres the quote.
    ”..His thoughts got to the Finance Ministry in Dublin who responded with, “Uninformed comment”. ”

    Funny why? Well I live in Dublin and Minister Lenihan,the finance minister and the government he serves in are widely regarded as the most corrupt and incompetent regime in the history of our state.
    Minister Lenihan was appointed finance minister in 2008.
    He had never held a finance position in government before ,has never worked in the private sector of business and has spent most of his life as a politician.
    You see , he is a lawyer and these are the skills he brings to bear during the greatest economic crisis in our history.

    The cabinet is made up almost entirely of lawyers and teachers.There is nt a single business man among them,not even one with an academic background in finance or economics.

  18. Theo

    Just my opinion: Greece, Spain, Italy and Portugal have serious debt problem. Greece’s problems are more serious, due to it’s more loose fiscal policies.

    But, when you consider the small size of the Greek economy, and the huge potential of a practically undeveloped tourism and international real estate primary destination, contrary to Spain, Italy, etc which are overdeveloped, and add to the mix the real estate shopping-spree from Russians in Greece, which is more Russian-friendly and geographically closer, I bet a lot more than ten dollars, that, if Greece seizes this “crisis” opportunity and make some much-needed financial reforms, it will rise dramatically in its finances, something that has happened again and again in this country in the 20th Century. And informed investors will reap the rewards – like the ones who invested in the NYSE in the 30s.

    Regarding the (dis)similarities between USA and the EU, there is a BIG difference that nobody has mentioned in these posts: The 2 “core” financial powers of the Eurozone, Germany and France, have their economies’ fundamentals right. Can anybody say this for the USA, after the September 2008 global crisis started from it’s core financial center, Wall Street? I don’t think show. In my opinion, due to this fundamental difference, the Dollar has a lot more unstability to face than the Euro, regardless of the Southern European countries. The epicenter of the crisis is the USA and the Dollar, and the happy Chinese has a lot more buying to do there than in the EU. We will see how that unfolds, but we should be ready for some big surprises in the future. It is like in sports: in a global economy, there are no “big” boys. Everybody can fail, and fail miserably, if he makes some serious mistake. And in this “failed” league, along with Greece and Spain, is also the US, Great Britain etc.

    1. Diego


      if Spain (public debt at 44% GDP) has serious debt problems, what should we say about the UK (59%), Germany (65%), France (72%) or the US (73%)? How can anybody relate Spanish debt levels to Greek ones (101%) or Italian ones (113%)?


      If Germany and France have right fundamentals, what should we say about Portugal (with a debt similar to that of France)? Did you take into account the pending fiscal responsabilities for the German demographic implosion?

      Europe is too complex to understand with simplifications like “weak PIGS – strong Germans”. Every country has its own specific problems and opportunities.

    2. Stellios

      Greece depends on shipping more than tourism. Countries that are totally reliant on tourism are usually backwaters. Greeks control one-third of the world’s merchant ships. Greece also has alot of banking exposure in Eastern Europe – a reason why Austria might also hit the wall.

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