Greece Needs to Exit!

Europe has extended deadline after deadline to strike a deal with Greece. It’s been a massive display of tensions across the euro zone – between Germans and Greek, the northern countries and southern ones. But now Europe is fed up.

Finally they came to a deal late Sunday night… but this is not a done deal yet!

Even though the latest agreement is tougher on Greece than the one they ironically voted against, German voters absolutely hate it. A recent TV straw poll showed that only 12% of them think Germany is being too harsh on the Greeks. There’s a great majority that thinks Greece shouldn’t get another bailout under any circumstances.

Then there’s Alexis Tsipras, who has the tough task of getting the Greek parliament, and voters, to approve this deal by Wednesday. And it’s more austere than the original that the Greeks heartily rejected by 61%!

When Greece voted Tsipras and his leftist party into power, the Greek people thought that if they screamed loud enough and threatened to leave, Germany and the euro zone would give them a debt relief that suits them. Huge miscalculation!

Instead, the euro leaders took their whining as a sign of further mistrust after they failed to comply with two bailouts totaling 220 billion euros. Now, they’ve demanded even more austere reforms and a fund of 50 billion euros in assets to make sure the Greeks put their money where their mouth is!

So the million dollar question this week is: Will Greece agree to this new plan now that they’ve basically had to barter to survive with the banks closed for two weeks? Or will they reject it and leave the euro zone altogether?

I suspect Greece will go with the new plan out of stark fear. They’ve had a look at what life outside the euro zone would look like over the past two weeks, and it looks grim.

And Germany will likely agree to the deal as well, though begrudgingly, as it has the most to lose if Greece exits the euro.

This is not what I’d prefer to see. I’d rather the markets sort this out without more and more political bantering. But here are the facts:

Greece’s government is in the gutter for 323 billion euros. 75% of that goes to foreign creditors.

If Greece decides it wants nothing to do with the latest negotiations and wants to default on that debt like Iceland did, it would be at the expense of every major European country that holds Greece debt directly or through their membership in the ECB and IMF. But it would provide massive cash flow relief to Greece’s government and its budget deficit.

This chart shows how much Europe’s “Big Four” could be out if Greece jumps ship:

Greek Government Debt by Country 2015

Germany holds the most Greek debt at 92 billion euros, which comes out to 3.2% of its GDP.

The others hold less, but at an even greater percentage of their GDP.

France holds 70.3 billion euros at 3.2% of GDP.

Italy 61.5 billion at 3.8% of GDP.

And Spain just 42.3 billion, but at 4% of GDP.

If Greece defaults, that money is largely or totally gone!

Potentially even worse, if Greece ejects from the euro and revitalizes the Drachma – the replacement currency – its value would only be some 30% to 50% of the euro.

Can you see someone from Greece paying 100,000 to 170,000 Drachmas to buy a BMW that costs just 50,000 euros today? Nope! So if Greece makes the switch, German and other euro zone imports would drop like a rock!

Think about how much Greece imports – 60.5 billion euros worth of goods. The largest player is Russia, which exports 8.5 billion in energy to Greece. Then Germany at 5.9 billion – 0.2% of its GDP – and Italy at 4.9 billion.

These countries stand to lose the most. Their exports would only continue to drop year over year until the Drachma gains in value again.

Of course, Greece would suffer in all this too.

With such a devalued currency, they’d face a new tax called “high inflation” to make up for higher costs due to their high ratio of imports. Again, take Iceland – its consumers saw a 20% spike in goods for a few years when the country defaulted and devalued its currency.

That means the Greek people would have to get their spending in line. And the Greek government would as well – with zero credit, it would be forced to balance its budget and increasingly enforce its taxes.

That’s what I’d prefer to see – kick Greece out of the euro for now and let the markets run their course. Politicians out to save theirs hides will only keep compromising so the next administration is the one that gets egg in its face!

If this happened, major debts would get written off and the stupid banks and governments that lent the money would take the biggest losses. And Greece’s exports would rapidly grow as its goods become more affordable with a lower-priced currency.

Greece will become the most affordable vacation haven in the Mediterranean overnight!

But it’s likely governments and politicians will continue to take the path of least resistance.

And it’s their loss. When Iceland went through some much needed restructuring, three years later it was doing better than most European countries. The free markets work if anyone would just simply let them!

Hopefully this drama will finally conclude on Thursday when euro leaders reassemble. We’ll know then whether my wish for a “Grexit” comes true.

Harry Dent

Harry

Follow me on Twitter @harrydentjr

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Categories: Foreign Markets

About Author

Harry studied economics in college in the ’70s, but found it vague and inconclusive. He became so disillusioned by the state of the profession that he turned his back on it. Instead, he threw himself into the burgeoning New Science of Finance, which married economic research and market research and encompassed identifying and studying demographic trends, business cycles, consumers’ purchasing power and many, many other trends that empowered him to forecast economic and market changes.