Tuesday, April 27, 2010

Return To The Drachma

The Greek tragedy continues apace.

Angela Merkel, the German Chancellor, had to make an emergency statement yesterday "promising" aid to Greece in response to the continued pressure brought to bear by the markets.

However, her politician's promise (which contained a pre condition) failed to mollify the markets who suspect that Greece will not be able to restructure its economy nor meet its debt obligations (even if Germany does finally agree to the bailout plan).

The interest rate on two year Greek debt rose to almost 14% yesterday, in response to rumours that Greece was seeking an emergency restructuring of its short-term borrowings.

The trouble with financial rumours is that they have a habit of becoming self fulfilling, especially during financial tsunamis; ie the increase in rates, brought about by the rumour, will force Greece to restructure its debt obligations.

Angela Merkel's statement contained a hidden threat which can be easily understood by anyone:

"I say quite clearly, Germany will help, if the corresponding pre-conditions are met."

She added:

"If Greece is prepared to accept tough measures — and not just for one year but for several years — then we have a good chance to keep and secure the euro as a stable currency for us all."

The domestic reality for Greece is that it simply cannot enact the tough measures demanded of it by the Eurozone.

The only viable solution for the Eurozone and Greece is for it to leave the Euro, and return to the Drachma.

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