Is The Euro Headed For A Breakup? ECB Prepares Legal Ground For Euro Rupture As Greek Crisis Escalates!

• Is this the beginning of the global monetary crisis? Although the coming default of sovereign debt by Greece is a problem, it is no where near, in magnitude to the bankruptcy of California. California’s economy is about 13-15% of America’s. Greece’s GDP is about US$340B compared to California’s US$1.8T. The ECB is correct in saying: ECB Says Greece Debt Crisis is Tiny Compared to California for the U.S. . What I am trying to highlight is that all major industrialized nations’ currencies are in trouble. People who turn from the Euro to the USD for safety is deceiving themselves. The current ‘strength’ in the USD is mis-placed trust.
   
• Will the Euro rupture? Will it break apart into 2 currencies? A core Euro based upon Germany, France … and a weaker Latin Euro for the southern European nations? The Wall Street Journal reports:
    
  Attention is now shifting towards the sustainability of public finances. The latest European Commission forecasts show the public debt-to-GDP ratio for euro-zone countries rising to 88% in 2011 from 69% as recently as 2008. Government borrowing is increasing sharply, fed by dwindling revenues and the cost of supporting the financial and other sectors.
   
  Markets are taking a dim view of sovereign indebtedness and have begun to focus on what they think are the most vulnerable candidates. After years with no noticeable market differentiation between euro-zone countries, bond and credit default spreads widened in early 2009 to their highest levels since the euro was introduced. … spreads have now widened again, especially for Greece, where the new government has overseen a substantial and adverse post-electoral revision of budgetary performance.
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  Exiting the euro would be significantly more challenging a proposition than joining. In such an event we would expect that households’ and companies’ efforts to circumvent conversion of their assets (and wages) would likely to lead to a severe financial crisis similar to the Argentine experience, when that country’s banks’ assets were converted at a less favorable exchange rate than its deposits. The cost of enforcing contracts still denominated in Euros would also likely increase, raising the cost of doing business and adversely affecting the business environment for many years to come. In sum, sovereign creditworthiness would likely suffer for any country exiting the euro zone.
   
  An even worse scenario could be one in which exiting governments redenominated their euro-debt and paid investors in a new form of currency. In such a case, access to future funding would likely be difficult and costly for a reneging government. Euro-zone governments are aware of the risks associated with exiting the euro zone and the potential costs of such an action for their economies. They understand what is at stake and that the price to pay would be too high.
   
• The Telegraph UK reports:
   
  Fears of a euro break-up have reached the point where the European Central Bank feels compelled to issue a legal analysis of what would happen if a country tried to leave monetary union.
    
  “Recent developments have, perhaps, increased the risk of secession (however modestly), as well as the urgency of addressing it as a possible scenario,” said the document, entitled Withdrawal and expulsion from the EU and EMU: some reflections.
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  Crucially, he argues that eurozone exit entails expulsion from the European Union as well. All EU members must take part in EMU (except Britain and Denmark, with opt-outs). This is a warning shot for Greece, Portugal, Ireland and Spain. If they fail to marshal public support for draconian austerity, they risk being cast into Icelandic oblivion. Or for Greece, back into the clammy embrace of Asia Minor.
   
  ECB chief Jean-Claude Trichet upped the ante, warning that the bank would not bend its collateral rules to support Greek debt. “No state can expect any special treatment,” he said. He might as well daub a death’s cross on the door of Greece’s debt management office. This euro-brinkmanship must be unnerving for the Hellenic Socialists (PASOK). Last week’s €1.6bn (£1.4bn) auction of Greek debt did not go well. The interest rate on six-month notes rose to 1.38pc, compared to 0.59pc a month ago. The yield on 10-year bonds has touched 6pc, the spreads ballooning to 270 basis points above German Bunds.
   
  Greece cannot afford such a premium for long. The country must raise €54bn this year – front-loaded in the first half. Unless the spreads fall sharply, the deficit cannot be cut from 12.7pc of GDP to 3pc of GDP within three years. As Moody’s put it, Greece (and Portugal) faces the risk of “slow death” from rising interest costs.
   
  Stephen Jen from BlueGold Capital said the design flaws of monetary union are becoming clearer. “I don’t believe Euroland will break up: too much political capital has been spent in the past half century for Euroland to allow an outright breakage. However, severe ‘stress-fractures’ are quite likely in the years ahead.” As Portugal, Italy, Ireland, Greece, and Spain (PIIGS) slide into deflation, their “real” interest rates will rise even higher. “It is tantamount to hiking rates in the already weak PIIGS,” he said. This is the crux. ECB policy will become “pro-cyclical”, too tight for the South, too loose for the North.
   
  The City view is that the North-South split may cause trouble, but that there will always be a bail-out to prevent a domino effect. “If a rescue turns out to be necessary, a rescue will be mounted,” said Marco Annunziata from Unicredit
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  Even if Greece can cut wages without setting off mass protest, it lacks the open economy and export sector that may yet save Ireland in similar circumstances. Greece is caught in a textbook deflation trap.
   
  Labour minister Andreas Loverdos says unemployment would reach a million this year – or 22pc, equal to 30m in the US. He broadcast the fact with a hint of menace, as if he wanted Europe to squirm. Two can play brinkmanship.

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