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A GREEK TRAGEDY: Opening pandora's box.

Summary: Will Greece stay in the Euro zone - or won't it? That is the million dollar question, and it is playing out like a Greek tragedy. BME looks at the implications

Will Greece stay in the Euro zone - or won't it? That is the million dollar question, and it is playing out like a Greek tragedy. BME looks at the implications

Will Greece stay in the Euro zone - or won't it? That is the million dollar question, and it is playing out like a Greek tragedy. BME looks at the implications

Will Greece stay in the Euro zone - or won't it? That is the million dollar question, and it is playing out like a Greek tragedy. BME looks at the implications

Will Greece stay in the Euro zone - or won't it? That is the million dollar question, and it is playing out like a Greek tragedy. BME looks at the implications

Will Greece stay in the Euro zone - or won't it? That is the million dollar question, and it is playing out like a Greek tragedy. BME looks at the implications

Will Greece stay in the Euro zone - or won't it? That is the million dollar question, and it is playing out like a Greek tragedy. BME looks at the implications

For months the debate has been raging. Politicians have been chasing their tails over a one-size fits all solution to the 17-nation bloc's woes. Now, it has culminated with the real fear that Greece could actually exit the Euro zone currency union. If it does analysts say the country's banking system will fall apart.

UBS said in a research note dated 22 May that one of the most critical risks would be the Greek banking system would rapidly collapse, "It is banking systems that administer the coup de grace to monetary unions, more often than not," it said.

"The costs of departure are excessive to both Greece and the Euro area. If Greece even considers making an exit of the euro, markets, international trading companies and bank depositors will all anticipate the consequences. This anticipation of exit would likely result in economic disorder."

CURRENCY OPTIONS

It is worth mentioning that Greece heads to the polls this month (17 June). So until that is over, many hands are tied.

Once the election is out of the way, Greece will have to decide whether or not to return to the drachma - or opt for a new currency instead. But that will lead to a depreciation of whatever currency it uses; a depreciation of as much as 80 per cent (which means more debt, more job losses, more austerity and so on).

"If Greece leaves the monetary union, its banks will have to be forcibly redenominated into the new national currency (presumably a new drachma)," UBS added.

CONTAGION

In the event of a Greek exit, contagion risks clearly exist. "There seems to be a great deal of official complacency about the ability of firewalls to prevent this. The risk lies in the contagion of bank runs," UBS said.

Neighbouring countries like Portugal and Spain, where the banking system is already on shaky ground, will come under intense pressure... and then the pain will filter further afield: throughout Europe.

"The possibility of other economies joining Greece in a disorderly departure from the euro must be assumed to be very high - and it is this risk that suggests rational policy- makers would not wish to gamble on the probabilities", the bank notes.

FALLOUT

Fears about Europe's growing debt crisis has wiped almost EUR 3.2 trillion ($4 trillion) from equity markets worldwide in May.

On home turf, bankers in Athens estimate that more than EUR 3 billion ($3.7 billion) of cash has been withdrawn since 6 May (and counting) and stashed into safe- deposit boxes or under mattresses, according to the Financial Times.

LOCKING HORNS

European officials are stepping up contingency planning for a possible Greek exit, but as of yet they are struggling to overcome differences on how to resolve the currency bloc's crisis. After inconclusive discussions at a summit in Brussels in May, leaders issued a communique saying, "The right measures are not the same for each of us."

Its contingency plan seeks to address what would be an unprecedented event in the modern financial system: how to buffer government bond markets, the banking sector and other financial markets in the event of a Greek exit. It is no easy feat!

The 17 countries that use the euro need fiscal union but they also needs stronger bank supervision and capital requirements. They need member nations to concede some measure of their sovereignty in the interest of a unified European economy.

"All the contingency plans come back to the same thing: to be responsible as a Government is to foresee even what you hope to avoid," Belgian Finance Minister Steven Vanackere said ahead of the European Union summit.

17 TO BECOME 16

No surprise, the summit ended with countries no nearer to agreement on how to deal with the crisis, and the divisions between France and Germany were more evident than ever. German Chancellor Angela Merkel, who has been labeled by some as Europe's new 'Iron Lady', and France's new President Francois Hollande are deeply divided.

France is among those nations reluctant to cede control over its banking sector and spending to a central European authority. Nevertheless, Hollande, is pushing hard for Germany to sign off on Eurobonds, without all of the necessary safeguards. From a domestic political standpoint, Hollande's position makes sense. France is deep in debt too and, like the United States, it recently lost its triple-A credit rating.

With the lack of a tangible process in resolving the crisis, it is unlikely this tragedy could ever be played out anything but disorderly.nBME

The right measures are not the same for each of us

2012 CPI Financial. All rights reserved.

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Publication:Banker Middle East
Geographic Code:4EUGR
Date:Jun 10, 2012
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