Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Chart Du Jour Greek Drachma vs Euro

Currencies / Global Debt Crisis Apr 29, 2010 - 10:38 AM GMT

By: Dian_L_Chu

Currencies

Best Financial Markets Analysis ArticleEurope's hopes of containing the crisis dimmed as Spain became the third euro-zone nation to be hit with an S&P downgrade in just two days, following steeper cuts on Portugal and Greece.


Fears of a Greek contagion to other euro zone nations ratcheted higher on that news sparking a market selloff across the globe, sending the euro to fresh lows against the dollar, and intensified the pressure to finalize a rescue plan for Greece.

Blaming the Euro Currency Union

The ongoing Greek debt crisis has revived the old arguments that all national governments need monetary sovereignty. Financial Times columnist Samuel Brittan also recently suggested that if Greece has its own currency,

“...it can issue its own money; so it can pursue a fiscal policy attuned to domestic needs, without being dependent on the international bond market.”

All Better With The Drachma?

So, what if Greece had stayed with the Drachma, and never switched to the euro? Would this debt crisis be averted? 

Unfortunately, as illustrated by the chart from the Council on Foreign Relations (CFR), in the six years before joining the euro, only 27% of Greek debt was issued in drachma. At the end of 2000, just before Greece joined the euro zone, 79% of its outstanding debt was already denominated in euros, and a mere 8% in drachmas.

Blame It On Profligate Spending 

This could only lead to an inescapable conclusion as noted by the CFR,

“Even if Greece had remained outside the euro zone, its dependence on euro borrowing would only have increased. A falling drachma would merely have brought the current crisis to a head earlier by accelerating the rise in Greece’s debt-to-GDP ratio (think Iceland)….problem is excessive foreign borrowing, a problem with which Greece has struggled since the early 19th century.”

Moral Hazard?

Meanwhile, a Greek official said the IMF is considering increasing the Greek loans to €100 billion to €120 billion ($132.5 billion to $159 billion) over three years, from the current €45 billion, but expressed doubts about whether the boost would happen.

The actions of the EU and IMF are sending a message to investors that it is not important that PIIGS nations have excessive and unsustainable public spending and fiscal deficits, because ultimately the countries of the euro zone who will resolve the problem.

There doesn’t have to be a rescue plan for Greece, as long as the markets believe in “the moneylender of the last resort” (the countries of the euro zone.)

In that sense, the debt-rescue-or-not saga of Greece could drag on for a while before some uncommon event forces a concrete resolution out of the EU and IMF.   

Dian L. Chu, M.B.A., C.P.M. and Chartered Economist, is a market analyst and financial writer regularly contributing to Seeking Alpha, Zero Hedge, and other major investment websites. Ms. Chu has been syndicated to Reuters, USA Today, NPR, and BusinessWeek. She blogs at Economic Forecasts & Opinions.

© 2010 Copyright Dian L. Chu - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in