16 May 2012

Reuters: Euro twilight zone beckons for Greece

Speculation about an endgame in Greece's protracted crisis has flooded markets with euro exit scenarios, but investors reckon there's still every chance that uncertainty will simply drag on for months.

The political vacuum in Greece after May 6's inconclusive elections seems to have hastened a showdown where no government in Athens can deliver more budget cuts, so no more bailout funds are forthcoming and public money drains away, leading to mass defaults and a euro exit with all its wider ramifications.

And if that's the will of the Greek people, then it may be tempting for all sides to try to manage the outcome as best they could. But nothing's that simple. Even though Greek voters rejected austerity in favour of anti-bailout parties, opinion polls show more than 75 per cent want to stay in the euro.

Many are looking at the possibility that Athens issues IOUs to meet salaries and key service bills for a fixed period, much in the way California did during its budget crunch in 2009 when it issued 'registered warrants' with a coupon in place of dollar salaries, and which banks then accepted for cash.

Much hinges on whether the European Central Bank would allow the Greek central bank to accept such IOUs and there's little clarity on those hypotheticals.

However, strategists reckon any Greek government IOUs would quickly act as a proxy for a new drachma, and exchange values against the euro would mostly likely plummet in practice as people rushed to cash out - offering Greeks a glimpse of the shock of devaluation in a euro-ised economy with euro-denominated debts. Others said that such an unstable twilight zone within the euro but with a parallel proxy drachma could possibly last for several months as the euro policy machine churned.

Depositor concerns in Greece could well infect other periphery euro economies and cause consternation - upping the ante for euro policymakers to respond, either through fresh action from the European Central Bank to reliquify banks or open-ended government bond buying.

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© Reuters