NYU's Roubini: Greece should default, leave euro

4:18 PM default, Greece, leave, Roubini, should No Comments

Luca Bruno / AP

Greece should start an orderly default, voluntarily leave the euro zone and return to its former currency the drachma in order to avoid a “vicious cycle of insolvency, low competitiveness and ever-deepening depression,” economist Nouriel Roubini said in a column published in the Financial Times Monday.

Roubini, a professor at New York University’s Stern School of Business who gained renown for accurately calling the housing bubble, said other potential options for helping the debt-stricken country -- including a weakening of the euro, a reduction in Greek unit labor costs or a rapid deflation in prices and wages -- are impractical and likely won’t work.

The process of defaulting and leaving the euro zone would be “traumatic,” Roubini said, but “a return to a national currency and a sharp depreciation would quickly restore competitiveness and growth, as it did in Argentina and many other emerging markets which abandoned their currency pegs.”

Fears that Greece may default on its sovereign debt and leave the euro zone have grown in recent days. Euro zone countries are becoming frustrated that the nation appears unable to meet the fiscal targets set out under its international bailout.

A poll of economists released by Reuters Friday showed that, while Greece will likely default on its debt within a year, there is only a one-in-five chance it will leave the euro zone.

The Reuters poll of more than 50 economists across Europe gave a 65 percent chance Greece would default. Half of the poll’s respondents said Greece would likely default within 12 months.

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Europe braces for impact of Greek default

10:15 PM braces, default, Europe, Greek, impact No Comments

By John W. Schoen, Senior Producer

With Greece just weeks away from running out of cash, the European Union is fast running out of options to save the currency union and head off another global recession.

The focus is now shifting to once-unthinkable scenarios that await Europe if the Greek government defaults on its debt.

Petros Giannakouris / AP

International Monetary Fund representative Bob Traa speaks at a conference in Athens Monday. The IMF, European Central Bank and European Union are trying to work out a plan to avoid a Greek debt default.

Hopes were raised that a weekend meeting of European Union leaders – aided by an unprecedented visit from U.S. Treasury Secretary Timothy Geithner – could break a downward spiral of confidence that has engulfed the European banking system.

But on Monday, after giving Geithner a chilly reception, European officials remained deadlock after nearly two years of failed efforts to head off a Greek default.

"A Greek default looks to be imminent,” Gluskin Sheff chief economist David Rosenberg write in a note to clients Monday. “The EU finance meeting was a colossal waste of time. Nothing concrete came out of it.”

There were fresh signs Monday that Greece has run out of time. Greece's prime minister abruptly canceled a trip to the U.S. to remain in Athens to deal with the crisis. European officials have delayed payment of the next $8 billion of financial assistance until Greece meets budget-balancing targets imposed as a condition for help. Without the money, Greece will be unable to pay government worker salaries and pensions by the middle of next month.

In a last-ditch effort to balance its budget, Greek officials last week announced a new $2 billion property tax – to be collected by the state electricity company. Workers there have threatened to refuse to collect the tax, and European officials Monday said the new tax would raise only half as much as Greek officials are projecting.

The revolt in Greece is echoing throughout Europe, as voters in wealthier “core” countries like Germany and France harden their opposition to bailing out weaker southern economies including Greece, Portugal, Spain and Italy. It’s part of a growing “revolt against Brussels,” according to Nicolas Burns, a former U.S. ambassador and now professor at Harvard's Kennedy School of Government.

“It’s reminiscent of the revolt by Americans against their own government in Washington, but it’s much more serious and deeply rooted in Europe,” he told CNBC. “People want to reclaim some control and ownership that used to reside in nation-states that now reside in this huge bureaucracy. It's difficult for politicians to overcome that depth of public sentiment."

The rising prospect of Greek default leaves European leaders with several unappealing scenarios.

Even if German officials relent and ease their insistence that Greece meet strict budget targets, the country faces a grim future. Spending cuts and higher taxes have sent the Greek economy in reverse, forcing bigger cuts, which only deepens the recession. That’s prompted some observers to call for an “orderly default.”

Such a default would wipe billions of dollars of capital from the books of Europe’s banks, which is making it harder for the banks to borrow.

Banks holding large chunks of Greek debt face the biggest losses, but it’s not clear which banks would be hit hardest. That’s sparked fears of another Lehman-like financial panic, when bankers grew increasingly skittish about lending to anyone holding shaky mortgage bonds. Only this time the “toxic” bonds are debt issued by Greece and Italy.

“What bank would want to lend to another if it felt that other bank’s solvency was threatened by exposure to defaulted government debt?” said John Higgins, a market economist at Capitol Economics.

In the Panic of 2008, U.S. bankers could turn to a single central bank and the U.S. Treasury for help. But Europe’s central bank is deeply divided over how aggressively to respond to the crisis. A senior German ECB official resigned last week over a proposal to have the central bank buy up more Greek and Italian debt. Europe has no national Treasury, which could force individual countries to bail out their own banks.

“(If Greece defaults), it's unknown which of these national governments can underwrite their banking sectors and which ones can't,” said Philippa Malmgren, an investment consultant and former economic adviser to President George W. Bush. "But you will have bank failures.”

A default by Greece also would raise the prospect of Athens leaving the euro zone and returning to its former currency, the drachma. German officials have already reportedly begun preparing for such an outcome.

Doing so would avoid a “vicious cycle of insolvency, low competitiveness and ever-deepening depression,” economist Nouriel Roubini said in a column published in the Financial Times Monday.

In the short term, reviving the drachma would inflict even more hardship on Greece: Its banking system would still need to raise fresh capital, while the cost of imports from Europe would soar. The hope is that over the long term it could repair the financial damage and restore economic growth.

A Greek default also would add to pressure on Italy, Portugal, Ireland and Spain. The risk is that these countries would be forced deeper into the same downward spiral. As nervous investors and creditors demand higher interest rates to offset the risk of a default, they would be forced to cut spending and raise taxes to pay the higher cost of borrowing. That would further reduce growth, making bond buyers even more nervous, raising borrowing costs higher – the same vicious circle that has engulfed Greece.

If additional countries were forced to follow Greece’s footsteps, Europe could be reduced to its “core” economies, led by Germany and France. It remains to be seen whether those countries could weather such a sharp contraction of the eurozone – even if it were engineered in an orderly fashion.

With time running out, and European leaders facing increasing voter resistance to forging a consensus, some have begun contemplating the prospect of a breakup of European Union. Such an outcome could have dire long-term consequences, according to Poland’s Financial Minister, Jacek Rostowski.

“In the absence of the key elements of our security system on the key elements of our political system that insures that we deal with problem in this peaceful democratic way that we’ve developed - if that were not there then the risk of all sorts of authoritarian political movements, and therefore the risk of even war, in the long horizon, rises,” he told CNBC.

CNBC's Michelle Caruseo-Cabrera has the latest from Athens:

CNBC's Michelle Caruso-Cabrera has the details on the finance minister to conference with Euro Zone and IMF officials.

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Fitch: Greece default values, but the hope of 'Window'

9:16 AM default, Fitch, Greece, values, Window No Comments

Athens/LONDON - rating agency Fitch declared that Greece as a result of a second bailout in temporary standard would be, said the Athens respite had bought it.

But the Agency required to Greece give a higher, "low speculative-grade" assessment had been exchanged after its bonds and said Athens had some hope of combating their debt, which most economists still expect to obtain a deeper restructuring in the future.

An emergency summit of Heads of State and Government of the 17-nation area agreed a second rescue package Thursday with an additional 109 billion euros ($157 billion) of government money, as well as a contribution from private sector of bond holders are expected to total about EUR 50 billion by mid 2014.

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Under the bailout of Greece that 110 billion euro from the European Union and the International Monetary Fund a restructuring plan in May last year completed, banks and insurance companies are voluntarily to help Athens swap their Greek bonds for longer maturities at lower prices.

"Fitch holds the type of participation of the private sector... limited default event represent one", said David Riley, Director of sovereign ratings at Fitch.

"The decline in interest rates and extending the maturities potentially offers but Greece window again solvency, despite the enormous challenges that it is for you," he said.

The Summit agreed the region Rescue Fund, the European facility for financial stability are allowed to buy bonds in the secondary market, when the European Central Bank, which is deemed necessary to cope with the crisis.

There can be also for the first time States preventive credit lines before they are closed by credit markets and Governments give money to the recapitalisation of banks, both movements which Germany earlier this year blocked.

As part of the package the euro-zone leaders a temporary standard made detailed provisions for the limitation of damage-the first in the 12-year history of the euro.

"It is a great breath of relief for the Greek economy and this on gradually on the real economy passes" reporters Greek Finance Minister Evangelos Venizelos. "But this does not mean that we can relax our efforts."

Among other steps agreed the Guide to terms of bailout loans to Greece, to facilitate Ireland and Portugal; Terms be extended cut now around 3.5 per cent to 15 years of 7.5 and interest of 4.5-5, 8 per cent.

It doubts remain about whether the plan went, but far enough to not only Greece debt sustainability, assure Ireland, Portugal and other highly indebted countries.

The package was "more than expected, but not enough to give us sleep comfortably", said Barclays economists. They were disappointed that the European Heads of State and did not agree Government, to extend a euro-zone Rescue Fund.

The advanced EFSF role is to prevent that larger States of the euro area such as Spain and Italy of markets because of fears a weaker country excluded by default.

Sufficient resources, so far, but the burden could rise significantly. A preventive credit line for a large country like Italy could more than 500 billion euros over several years as a whole, overwhelming the EFSF current 440 billion euros.

Debt
French President Nicolas Sarkozy said on the Summit agreed debt of Greece would measures by 24 percentage points of GDP by about 150 percent today.

Remain still a colossal debt for an economy deep in recession with no way to a competitive devaluation.

In addition, the figures are based on what analysts say optimistic projections for growth and returns from a sweeping privatization program.

"Our estimates of Greek debt/GDP ratio will fall around 25 percentage points more than 5 years as a result are these measures but still a whopping 120 percent in 2016, even on the assumption that the full 50 billion privatization be implemented measures," said analysts at JP Morgan.

"We therefore believe that spreads (bond) to expand, scattered again short coverage and reality sinks."

Euro brushed close to a two week high prices for Greek, Irish and Portuguese bonds jumped, and the cost of insuring their debt fell Friday. But traders said that expectations of a larger restructuring on the street were visible.

The European leaders promise a "Marshall Plan" to help the European public investment, to revive the Greek economy can help, although details were thin.

Agencies standard & poor's and Moody's are likely to rating Fitch example to follow, because banks and insurance companies write the value of Greek bonds to around 20 percent, with perhaps more casualties are expected to follow.

"We have long held, that the most likely result for Greek bondholders would she would followed first by a larger at a later date a small haircut." "Greece a real chance they give have likely a write down close to 65 percent, to", said Gary Jenkins, head of fixed income research on development.

The Summit accord was based on a common position by hand by Merkel and Sarkozy in late-night talks in Berlin Wednesday with the Jean-Claude Trichet of President of the ECB.

The ECB has drawn and it signaled standard was prepared to let Greece temporary – so long as it was strictly a one-time.

But Fitch said that similar creditors private participation in future help for Ireland and Portugal would expect, if she had stabilized its finances, not until 2013.

Many economists believing the only way out of the euro zone debt crisis in the long run may be closer integration of the national Steuerpolitiken--for example a common euro-zone countries loans and issuance of bond guarantee one common euro-zone, to finance all countries. Germany has this against.

Sarkozy, is to at least looking more radical reforms.

He said that to improve the governance of the block, "our vision of the future of euro area highlight." would make proposals by the end of August France and Germany

Merkel said that she would allow no Union of automatic transfers from wealthier poorer States. "This will not happen ever I believe", she told a press conference.

Copyright 2011 Thomson Reuters.

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NYT: S & P says that Greece in default risk is

5:26 AM default, Greece No Comments

Greece risks be assessed in the on its debt obligations, if banks are forced to bear part of the pain, said standard & poor's Monday, suggesting that current proposals for the rescue of the euro zone may be reconsidered most vulnerable Member States.

In particular said S. & p a by the French Government and proposed banking plan "requiring debt restructuring could private sector in a way that we would view as an effective standard," in a statement.

The impact of Greek default would be felt all over the world. The country's debt of 330 billion euros may not be large enough, set off to a new financial crisis, but once the precedent of the euro zone had been set by default, investors would probably the debts of the other members are fighting, including giving up Portugal and Spain.

Alarming is to have the Western banks, including the giant of Wall Street, a tower of credit default swaps built - in the main insurance - the debt of these countries and the costs of payment up to in a standard-would be enormous. While the French and German banks have the most direct exposure to the Greek debt, it is American banks and insurance companies, which has the largest commitments to cover the payments to the guests with SWAps.

Identification of the credit rating agencies standard would have to E.C.B. impose discounts, known as hairdressers, on the Greek debt, which has accepted it as collateral. She would hold more financial pain on banks causing that debt.

Euro-zone finance ministers agreed over the weekend to Athens with funding of EUR 8.7 billion to provide, or $ 12.6 billion from 110 billion euro bailout agreed last year to help the Greek Government function through the summer. The view is attributable to a short-term standard of new aid.

But the Finance Ministers, how a second rescue mission reportedly € up to 90 billion estimated, to keep the country running until 2014, if it is to be hoped that Greece can return to the credit markets.

The sensitive issue of sharing the pain with the private sector suggests that the discussion of the second bailout for months could continue.

French President Nicolas Sarkozy announced June 27, French banks under which banks the most income of establishments which due until the year 2014 to new Greek reinvest securities would Greek debt had agreed to a plan.

"If it voluntary," Mr. Sarkozy said at the time "it would be considered as a standard-sized danger of an increase in the crisis."

Roles on some of the Greek debt agreed operations to Germany's largest banks.

But standard & poor's said Monday that it "" certain types of debt Exchange and similar restructuring as equivalent to a default views: If a transaction is considered a "tortured instead of purely opportunistic" and if it results in "get less value than the promise of the original securities investors."

It was said that both conditions seems on the French proposal.

S. & p. Greece long-term rating CCC, has cut already deep in the junk-e-region.

European officials are anxious that setting from one of said standard, Gilles Moec, an economist at Deutsche Bank in London, to avoid, since that could lead to a crisis in relations with the European Central Bank.

The E.C.B, which itself holds has billions of euros of Greek debt, said it could accept only, the participation of the bondholders any restructuring it would be "completely voluntarily."

The Central Bank - which has Greece help by buying its debt on the secondary market - "do not want to endanger his record, more public", said Mr Moec. "It's one thing to say she will accept Greek Government bonds, it is another thing, something in its balance sheet, which ceased to be paid, the definition is the standard."

"It means not the Greek securities does not want to be paid", he said, adding: "the E.C.B. in would be able to accept it if the final structure was relatively healthy." "One thing that does not want the E.C.B. is any violation of his right to the security to decide, that takes it."

This article, "S. & p. Bank warns plan would cause Greek default," originally in the New York Times appeared.

Copyright © 2011 New York Times

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