September 14th, 2011
08:32 PM GMT
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London (CNN) – Endless political rhetoric and billions in bailouts have left Greece no closer to solving the dangerous dilemma it is facing today.

Should the country give up trying to pay its bills and incur the wrath of its creditors? Or leave a monetary union that has brought a decade of comparative prosperity and stability?

So, how much is at stake?

Greece has $370 billion of outstanding debt - equal to around 3% percent of the eurozone’s total obligations. Compare that with 23% percent for Italy, whose debt pile stands at a whopping $1.9 trillion - and you can see that a Greek default would be less extreme than for other, larger eurozone partners.

But Greece is grabbing the headlines because its predicament exposes potentially fatal errors in the common currency project.

The 17 countries that share the euro are a disparate bunch with no fiscal union to back up their monetary marriage.

The legal framework is also inadequate and does not provide for the scenario Greece is now facing.

To make matters worse, aside from playing puppet and paymasters extraordinaire, Germany and France are obliged to support their poor cousin because they have the most to lose if it does go under.

Germany's banks holds the lion share of the world’s exposure to Greece with an eye watering $22.65 billion held in Greek sovereign debt and $2.24 billion of holdings in Greek bank bonds.

France's banks are exposed to more than $17 billion. This is one of the reasons why Angela Merkel and Nicolas Sarkozy are the ones calling the shots on Greece’s fate.

Six months ago default was treated as a dirty word among politicians, now it’s a ‘day-to-day’ term. This is because we’re already one step closer to it.

Investors in Greek debt have already faced ‘selective default’ earlier this year when they were asked to swap their securities for others with less attractive terms.

This measure was designed to prevent a full-blown credit event but now EU leaders and traders alike are preparing themselves for more.

The cost of insuring Greek debt with credit default swaps was pricing in a near 100% chance of Greece eventually having to miss its debt payments. The question is now not ‘if’ but ‘when’ and whether the rest of the world will have time to prepare, as immortalised by the new political buzzwords of ‘orderly default.’

How would investors react?

The legal wrangling over recouping Greek assets could hinge on whether Greece had sold its bonds with ‘collective action’ clauses. This could prevent individual investors from trying to recoup the bulk of their investments while the debt is being restructured.

Legal experts say ‘vulture funds’ may still attempt to buy Greek debt on the cheap, then try and negotiate favourable terms.

Departure: What’s to lose?

Greece’s financial woes continue to undermine a currency shared by more than 320 million people and responsible for significant chunk of world trade.

UBS estimated earlier this month that if Greece were to leave the eurozone it would instantly lose half of its gross domestic product. That’s not an attractive option for an economy poised to contract 5%.

Yet the decision may be made well beyond Greece’s own borders.

Charles Proctor is a partner at London-based law firm Edwards Angell Palmer & Dodge. He says the current EU treaties would not allow a member state to leave the union or be expelled by other members. (According to Proctor, the current framework doesn’t provide for a default either.)

Then again, he adds “there’s what the treaty says and then there’s real life.”

If Greece were contemplating a euro exit – which it has repeatedly denied – Proctor reckons a currency swap would have to happen overnight as it would immediately lead to a run on domestic deposits in Greek banks.

Under the current rules, if Greece wanted to leave the only option the euro legally, it could only do so by leaving the entire EU.

Then this week Brussels began dropping hints….

Are euro bonds the answer?

Veteran financiers like George Soros have touted the idea issuing bonds backed by all eurozone members as a potential solution to the crisis of creditworthiness facing individual countries in peripheral Europe like Greece and Portugal.

In a speech on Wednesday this idea was backed up by European Commission President Jose Manuel Barroso.

"I want to confirm that the Commission will soon present options for the introduction of euro bonds,’’ Barroso said.

‘’Some of these could be implemented within the terms of the current treaty, and others would require treaty change."

Okay, unlike Merkel and Sarkozy Barroso would not need to sell this idea to an electorate fed up with writing blank cheques.

But the question is, if they do change those treaties will they also provide for a member’s default or departure as eurozone leaders have woefully failed to do so far?

I might be putting my neck out on this one but I bet they’d consider it.

soundoff (29 Responses)
  1. sgtgismo

    Perhaps more so than ever many countries including USA need to get their houses on order. It seems as if China is negotiating with Italy on purchase of bonds just as USA owes China now about a trillion and a quarter dollars.

    September 15, 2011 at 1:16 am |
  2. Leo

    Greece should exit. The use of the Euro was not a good idea. It created too many impossibilities that the local economies could not contain or manage hence the defaults.

    The time has come to tell the world that the inflated status of the Euro is not sustainable due to many disparities in the countries especially the poorer nations suddenly having to share the spread of their new found wealth. Economies have to grow organically and naturally with the countries per capita income. Before the Euro their currencies could buy a lot more and stretch out better. After the Euro their local small economies collapsed making way for corporates to come in and dry up the ponds.

    The situation now is that the ponds will no longer be there because someone has covered it up. This is the issues now with Greece and Italy and many more. Eventually all will collapse and a EU rececssion will take place amidst the rich countrues in the EE.

    September 15, 2011 at 4:23 am |
  3. Romanian

    Having no European Union is a bad idea. Having a European Union is also bad. What is the solution? Simple, break the EU in smaller EUs according to economic factors. Have a Mediteranean European Union with Portugal, Spain, Italy, Malta, Greece and Cyprus, Slovenia and Bulgaria. An Atlantic EU : UK, Ireland, Benelux, Fr , Germany and Austria, A Scandinavian Union, and a Central EU with the Baltics, Poland, CZ, SK, Ro and Hu. Then the differences between the countries would be less pronounced, they can each have a common regional currency and still stand strong as a region on the Global market.

    September 15, 2011 at 5:20 am |
  4. Paul Johnston, PhD Economics

    I love how Germany, France & US say they want to save Greece, but they do not get it yet that it is Greece's Politicians who have stolen everything from the Greek People and NO BAILOUTS will help unless those Politicians are held accountable... Otherwise the Greek People will REVOLT IN MASS & TEAR GREECE APART!!

    September 15, 2011 at 6:09 am |
  5. Paul Johnston, PhD Economics


    September 15, 2011 at 6:11 am |
  6. Jim Nestoredes

    Well said Paul Johnston.
    The politicians in Greece are THE most corrupted in the EU. For decades they made a fortune by exploiting the state's wealth, overcharging for every project for the sake of their rich financial supporters.
    The problem is that the worldwide media do not report this aspect and most of the people think that Greece will default because most of us are drinking ouzo all day, being lazy and having fun.
    The fact is, except those working in tourism which may be more lazy I don't care, business in Greece is not about Hotels and Tourism. The majority of us are middle class employees in a huge variety of businesses. We pay our taxes each and every year. The EU(Comission)-IMF-ECB, known as Troika, has made it unbearable for us to live anymore.
    Without any wrongdoing we are obligated to pay crazy taxes (even the Minister of Finance announcing them admitted it publicly that these are crazy taxes which we are obligated to take).
    After paying 2010's taxes, on June they said we should pay an additional 'special' tax. For most people this taxes is almost half a wage.
    On September they just announced another tax: Everyone who has a house must pay another tax (equal to 1000-2000 euros for most people) even if he is unemployed. Otherwise, the power (yes the power) will be cut off. Is the fascist or not?
    There are people who really cannot pay those taxes and there are people leaving this country like in the 50s...
    I making a plea to CNN and other media: Please, please publish the true story of our misery. Nobody will be able to live here soon.

    September 15, 2011 at 7:26 am |
  7. John McKenna

    From Plato to NATO

    September 15, 2011 at 7:45 am |
  8. douglasjames

    Is Greece really a major player? The only GNP that they have is olive oil. The first traders in the Med. were the Phoenicians and they would trade purple dye for olive oil with the Greeks.
    Has much really changed? The major production is olive oil and throw in tourism, that is about all that they have to offer, so to think that they are a major player is someone misleading.
    Greece has deep water ports and is basically a gateway to the Middle East. The European Union and the United States see them as a major player for the strategic location, so this might be one reason they were welcomed into the EEU.
    The Europeans will not fall apart if Greece defaults. However, if Germany and France continue to open the check books and continue to keep the EEU afloat, there may be problems down the road.
    The United States is in trouble and cannot bail the EEU out, for Wall Street having problems of its own. Let's face it the Western Civilization is in a financial crisis and not one country can change the complexion of the economic picture, in particular Greece.

    September 15, 2011 at 8:52 am |
  9. Strangewalk

    From what I'm reading, Greece was done a deal by the international banksters very similar to what happened in Iceland, but on a larger scale, so why not handle it like the Icelanders did? First, the Greek people need to get rid of their government, violently and implemented by the military if necessary. Then leave the Euro completely. After that tell all the creditors to go to hell.

    September 15, 2011 at 9:16 am |
  10. Georgios

    douglasjames your oversimplification of the country's GNP borders to insult. A simple example is Greek shipping.
    Jim Nestoredes, unfortunately we are worthy of the politicians WE elected.
    To all, I've lived and worked all over the world including the USA. Greek private employees are skillful, hard working and underpaid! Enough with the lazy comments... These employees carry on their backs the bloated public sector and the corrupt politicians. The taxes imposed lately will cause public unrest and do nothing but worsen the economy. Recession and unemployment are reaching historical highs! As for Germany and France, once their banks are safe they will let Greece go, I give it a few more months...

    September 15, 2011 at 11:25 am |
  11. douglasjames

    George: Of course it should be an insult, and the oversimplification, yes that is why I wrote what I did. Lazy, Lazy,try Crete! I was out of Greece for two years, came back to Crete and the very same location where the Greeks were building a home was in the same condition as when I left.
    Lazy people, omg, of course, as a whole, I lived thee, on Naxos, Athens, Corinth and Paros, and what saw was laziness, so it is ok you are insulted, and well you should be.

    September 15, 2011 at 11:36 am |
  12. Georgios

    Obviously you were a "visitor" and did not work here. That is OK I will accept your right to say your opinion, of course I do not agree with it, as I said I have worked all over the world and have personal experience. By the way come back again. We need all the tourists we can get. Even if they keep coming back without understanding us...

    September 15, 2011 at 11:41 am |
  13. douglasjames

    I understand! I was married to a citizen of your country! I do understand, trust me! How well do I understand, I am a simpleton with a PhD in stupidity. I payed my dues in Greece, believe me, George.

    September 15, 2011 at 11:45 am |
  14. Clive Gerada

    Greece.... do not leave the Euro.... BUT LEAVE EUROPE!

    September 15, 2011 at 12:32 pm |
  15. alexia

    douglasjames, 1) did you even consider that the house was in the same condition due to lack of cash to go faster? 2) Goodbye and ...don't keep in touch.

    September 15, 2011 at 12:40 pm |
  16. Georgios

    Clive welcome to the discussion and thank you for the intelligent comment.

    September 15, 2011 at 12:46 pm |
  17. Paul Johnston, PhD Economics

    Greek politicians for past 30 years have looted the wealth of the country and they still doing so. Greek politicians and its present government are not capable to solve any problem because lack of honesty and professionalism. Stealing and bribery is widely spread in the Greek governments, and corruption will continue to exist for as long as politicians are themselves immoral.

    September 15, 2011 at 1:45 pm |
  18. A Little Bird

    I don't give two hoots what happens to Greece.

    September 15, 2011 at 2:12 pm |
  19. EDMW

    I really love Greece, i am going there every summer, and i love their hospitality and sea. However, they are lazy! I am not talking about those employed in the private sector (tourism in their chase), i am talking about huuuge lazy public sector. It is actually their debt! They were honestly earning 6 monthly wages, but they would receive 14 monthly wages per year. Politicians would promise them everything just to win the elections. Another problem is that they are avoiding to pay taxes whenever possible!

    Greek case is the best example for the sentence: There is no such thing as a free lunch!
    Now, they need to pay!

    September 15, 2011 at 2:13 pm |
  20. Georgios

    The problem EDMW is that everybody pays, not just the public sector... Hiring in the public sector was (is) the easy way to earn votes... However were was the EU when they were racking up the debts? Or the various bankers who were turning a blind eye while dolling out the loans! They have responsibilities as well!!! There should be no free lunch for them either...

    September 15, 2011 at 2:42 pm |
  21. douglasjames

    George, you do not like my "intelligent" comments, but Cilve's worked for you. How open minded! I know about you for I was married to a Greek! I could expect nothing less! Enjoy Greece!

    September 15, 2011 at 2:59 pm |
  22. Timos

    Who is going to default first Greece or the US?

    Interesting article written by the BBC's economics editor in the UK

    September 15, 2011 at 11:37 pm |
  23. BeeGee

    What's $22 billion to Germany? UBS just lost $2 billion and they will just shake it off. When you get in bed with the Greeks you need to be prepared to take it like a man. Germany and France will just have to take their lumps.

    September 16, 2011 at 7:04 am |
  24. DK

    The best course of action for the Greeks would be to overthrow their government, default on their debts which will save them from paying the interest and raise loans using some of their islands as collateral until they are back on their feet.

    September 16, 2011 at 10:24 am |
  25. Freddy

    Greece has huge gold reserves. They should not be allowed to default.

    September 19, 2011 at 1:09 pm |
  26. Paul Johnston, PhD Economics


    September 20, 2011 at 9:37 am |
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