Tuesday, September 20, 2011

Roubini: It's Time for Greece to Leave the EU

Nouriel's views on what should happen with Greece.  Of course this solution would not allow for even more transfer of funds from the taxpayers to European banks, so it won't happen easily.

It's interesting in the big picture, in that if there was no EU, there would be no current 'problems' in these countries that could not be solved via U.S. solutions i.e. slowly doing partial defaults over long periods of time by printing and debasing your currency.  You'd just have a lot more actors doing it. I assume other than inflation risks, there would be no major outcry over this as it's now the standard solution in the biggest economies on Earth.

  • With its creditors demanding ever more draconian cuts in spending and growth a distant memory, Nouriel Roubini is calling on Greece to default and exit the euro.  "The recent debt exchange deal Europe offered Greece was a rip-off," said Roubini in a commentary in Tuesday's Financial Times. "If you take into account the large sweeteners the plan gave to creditors, the true debt relief is close to zero."
  • The major problem, in Roubini's view, is a lack of growth and competitiveness, which can only be overcome by currency depreciation.  "A return to a national currency and a sharp depreciation would quickly restore growth and competitiveness, as it did in Argentina and many other emerging markets that abandoned their currency pegs," he said.
  • Analysts at UBS recently estimated the cost of leaving the euro for a peripheral member of the euro zone such as Greece could cost between 40 percent to 50 percent of gross domestic product in the first year alone, but Roubini believes the sitatution could be managed—albeit with some heavy losses for euro zone banks.  (well there is the rub Mr. Roubini - remember, banks are people too.  Oh wait, that is just in the U.S.)
  • "Overnight, the foreign liabilities of Greece's government, banks, and companies would surge," said Roubini. "Yet these problems can be overcome. Argentina did so in 2001, when it converted its dollar debts into pesos. The U.S. did something similar in 1933, when it depreciated the dollar and repealed the gold clause." 
  • Euro zone financial institutions would need recapitalizing and draconian measures would need to be imposed on the Greek banking system to avoid its implosion, according to Roubini, who believes the short-term and long-term benefits for Greece are better than the current path that Athens finds itself on.
  • "Via nominal and real depreciation, the exit path will restore growth right away, avoiding a decade-long depression," said Roubini who warns that contagion for countries such as Italy and Spain is already a reality, and requires liquidity support from the European Central Bank or the European Financial Stability Fund.  "Like a broken marriage that requires a break-up, it is better to have rules that make separation less costly to both sides" said Roubini.

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