Greek Debt Crisis – ECB and IMF Bailout
Published: March 22, 2012
Article by: Josh Wilson, Senior Trader
As the Greek population continued its protest over the austerity measures proposed by the E.U. and IMF, yesterday we may have witnessed the first step taken to save the country as parliament passed a vote of confidence for the Greek Prime Minister George Papandreou’s new cabinet. Next we will see if the government can pass these austerity measures to keep the European country from defaulting on its debt. European finance ministers have stated that Greece has until July 3rd to approve the required steps, in order to receive the next installment of 110 billion Euros from the European Union and International Monetary Fund.
I was fortunate enough to fly in to Athens last week to witness firsthand what is really going on in the debt stricken country. While in Greece, I was able to participate and watch one of the largest demonstrations in the country’s storied history. The citizens are not giving in to the harsh sanctions that the IMF and European Union are pressing on in order to provide another bailout package and keep the country from defaulting.
After speaking to numerous locals of Athens, the same message was mentioned over and over. The Greek’s do NOT want the bailout package under the current terms. Many mentioned they would prefer to leave the European Union and revert back to their own currency, the Drachma, last used nearly a decade ago. It was in January of 2002 that the Euro began circulating throughout Greece, after the exchange rate between the Euro and the Drachma was originally fixed on June 19 of 2000.
Even if the IMF and European Union decide to give Greece a second bailout, a problem still relies in the acceptance of terms imposed by finance officials. If the Greeks do not accept the austerity measure there is going to be havoc and volatility in the Euro and global markets. The situation is similar to what happened in Argentina back in early 2000’s, after Argentina defaulted on their debt and significantly devalued their currency. However, the main difference with the Greek Debt Crisis is that Argentina was not a part of a monetary system that involved multiple countries, like the 27 members in the European Union.
The worries officials have all over the world is that if Greece defaults, it is very likely to spread throughout the European Union and possibly sending the USA back into a recession. However, if Greece does give in to the austerity measures and receives the bailout package, it is possible they will never be able to repay the loan. Either scenario leaves the entire European Union is in a sticky situation.
Similarly, it’s not prudent for the stronger Euro zone countries to cut their aid at this stage. German exports are climbing, among others, because of the weaker euro caused by Greek debt worries. Germany wants peace in Europe – a key reason why the European project was initiated in the first place. Germans have been stuck bearing the bill of other European Institutions financial downfalls, and it looks like they will continue to subsidize them. It’s also in the interest of the rest of Europe to keep subsidizing the peripheral countries to allow the financial system to strengthen and better stomach a default, which may very well occur further down the road.
The best incentive provided for reform is the pressure of the bond market: the language of the bond market is the only language policy makers understand. Think about the reforms that have been implemented in Greece, Portugal, Spain, Ireland, often with rather weak governments. And when the opposition sweeps to power, such as in Portugal now or possibly in Spain next year, guess what: the bond markets, not the politicians, will continue to be in the drivers’ seat. In the U.S., we believe it may play out the same way: policy makers may only come to their senses once the bond market forces them to; except that because of the current account deficit in the U.S., the U.S. dollar may be far more vulnerable than the euro. In the Euro zone, the current account is roughly in balance, making it possible to have lackluster economic growth combined with a strong currency.
The Germans in the end will probably bite the bullet and head off the Greek debt crisis. The French, too, will pony up. They have no choice. As seen below they have even more at stake than Germany:
Even during economic and political uncertainty, Forex traders that focus on “Price Action” have an uncanny ability to profit from these volatile markets.
Check out my video I filmed while I was in Greece, and see live footage of the demonstration in front of Greek Parliament on Wednesday, June 15th 2011. Hope you enjoy the video…
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