Strategic Briefing | 5.15.12 | Will Greece Leave The Euro?

European leaders and financial markets braced for Greece exit from euro
The Guardian | May 15
With attempts in Athens to form a government after last week’s election looking increasingly doomed, European leaders abandoned their taboo on talking about the possibility that Greece might have to leave the euro.Shares, oil, and the euro were all sold heavily on Monday in anticipation that anti-austerity parties would garner support in a second Greek election likely to be held next month, bringing the row between Greece and its European creditors to a climax.

Greece Gets Hint of Leeway From Euro Officials
Bloomberg | May 14
European governments hinted at giving Greece extra time to meet budget-cut targets, as long as the financially stricken country’s feuding politicians put together a ruling coalition committed to austerity. Calling talk of a Greek pullout from the euro “nonsense” and “propaganda,” Luxembourg Prime Minister Jean-Claude Juncker said only a “fully functioning” Greek government would be entitled to tinker with the conditions attached to 240 billion euros ($308 billion) of rescue aid.
Fears of Greece EU exit rattle markets
MarketWatch | May 14
“It is generally accepted that the euro zone is better positioned now for a Greek exit than it was a year ago,” said Jane Foley, senior currency strategist at Rabobank International, in a note. “That said, it is widely accepted that any sign that Greece could be preparing to exit the system would still trigger contagion in the more vulnerable euro-zone bond markets.” The greatest uncertainty surrounds how much collateral damage a Greek exit would wreak on other vulnerable—and much larger—sovereigns, particularly given the already-weakened position of Spain, Foley said.
Greek coalition talks drag on as stocks tank on fears over fresh vote
Associated Press | May 14
For the ninth straight day, Greek party leaders were struggling to form a coalition government, riven by differences over the harsh austerity measures demanded by international creditors in return for rescue loans. The impasse means the debt-stricken country is facing the prospect of another national election next month after holding an inconclusive ballot May 6.
Greece and the euro: What’s next?
CNNMoney | May 14
“The threat from Greece remains real, and Greece exiting the euro area would likely have contagion effects that cannot easily be addressed in the current set-up,” said Bank of America Merrill Lynch analysts in a note Monday. “The next weeks are crucial.”
Risk of Greek Euro Exit Rattles Markets, but Hints of More Talks Emerge
The New York Times | May 14
As gridlock among Greece’s political parties made new elections and another month of uncertainty there all but inevitable, European markets dropped significantly on Monday amid concerns that Greece’s departure from the euro was near, and right behind it a new round of financial instability for Europe and the outside world. Yet there were also indications emerging on Monday that the latest turmoil could as easily signify the beginning of a new phase of bargaining between Greece and its European lenders as it could a sudden Greek exit from the euro zone.
If Greece has to leave the euro, it will be because of the reckless decision to bail it out in the first place
Andrew Lilico (The Telegraph) | May 15
The reason Greece is likely to leave the euro is precisely because it was (or, more specifically, those that had lent money to it were) bailed out in 2010. Under the scenario above, official creditors (the IMF, the Germans, etc) would have lent money to Greece only after it had defaulted, much as a classic IMF package involves the IMF lending money to countries after they devalue. But what actually happened was that the official creditors lent money to Greece to try to stop it from defaulting.
A Greek default, a euro collapse?
Gwynne Dyer (The Spec) | May 15
The Greeks will probably be using new drachmas before long. The Spanish may also be back to pesetas and the Italians to liras before we are much older. Perhaps the euro will survive as the common currency of the rich and efficient economies of northern Europe, and perhaps not. But the demise of the euro would not mean the end of the EU or of peace in Europe.