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Monday, April 26, 2010

Greek Crisis Worsens

It seems that Greece's hopes for a temporary respite from the financial tsunami currently engulfing its economy have been a little premature. Despite being "promised" a bailout package by the IMF/EU, and despite finally asking for bailout aid, it seems that Greece may not yet receive this aid.

For why?

Germany is insisting that Greece commits to wholesale economic reform (which will inflict more pain domestically).

Germany's finance minister Wolfgang Schauble has told a German newspaper that a decision on aid had not yet been made, and could yet be "negative".

The aid package will need to be ratified by the German parliament, and there are legal challenges in the offing.

In brief, the "promise" of aid was intended to provide a sop to the markets. It was never intended that the aid be actually paid out.

Unfortunately for the optimists in the EU, the markets are not so naive and know full well that the aid package was over hyped and that Greece has no intention (nor any domestic political power) to enact the powerful financial reforms necessary to placate the Germans. The markets are savaging the Greek economy, and pushing interest rates to unbearable levels.

The only viable solution for Greece, and indeed the Eurozone, as I have long argued is for Greece to leave the Euro.

Sadly for the Greek people, the country will not voluntarily leave the Euro and will be forced out by the markets. The pain that Greece is suffering will, in the short term, become far worse.

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