Post-Greece Euro

The Greek debt situation is going downhill in a hurry. The discussion seems to have switched from how to bail out Greece and keep it in the monetary union to how to defend a post-Greece Euro. Bloomberg offers their opinion.

With bailout talks between Greece and its creditors collapsing, it seems sensible to start reflecting on what defenses the euro might need against the fallout of a nation leaving the common-currency project. Once euro membership is proven to be anything but irrevocable, the remaining members will need to reassert their unity. And one way to do that would be to resurrect, in slightly modified form, the concept of euro bonds.

Discussing Grexit is no longer taboo in the upper echelons of the European Union. “The shadow of a Greek exit from the euro zone is becoming increasingly perceptible,” German Economy Minister and Vice-Chancellor Sigmar Gabriel wrote in Bild [am Sonntag].

The rationale is that once Greece leaves the EU the others need to pull together in order to avoid another debt default and departure.

The Final Days

Surprisingly markets have not reacted strongly to the possibility of a Greek exit from the Eurozone. Perhaps this is because no one believed that it would be allowed to happen. Now as possibility has converted to probability the markets are getting worried as noted by the Financial Post.

Stocks dropped around the world after Greece ruled out presenting new proposals to resolve a debt crisis. Oil climbed for the first time in four days, while bunds rose following a decline in German investor confidence.

Financial markets, long undisturbed by the wrangling over releasing billions of euros of financing for Greece, reacted with mounting alarm, with European stock markets hitting their lowest level since February.

We can chalk up much of the market concern to uncertainty about a post-Greece Euro if the Greek exit is followed by the exit of other nations. A meltdown of the EU would be worst result of a post-Greece Euro.

Who Loses Money?

Creditors will be the first hurt if Greece defaults on its debts. Reuters discusses the situation.

Greece and its creditors hardened their stances on Monday after the collapse of talks aimed at preventing a default and possible euro exit, prompting Germany’s EU commissioner to say the time had come to prepare for a “state of emergency”.

Greece needs to pay an installment of €1.6 billion by the end of the month. But its overall debt burden is in the hundreds of billions of Euros. Banks, nations, the IMF and the European Central Bank will all be hurt if Greece bails out. A post-Greece Euro will probably be driven by concern about what the next steps will be. Traders are already fleeing to options in order to hedge their trading positions. It is the volume of open options that is the salient sign as traders concern themselves regarding a post-Greece Euro or a last minute recovery if consensus is reached and a long term deal is reached.