The British papers have conflicting stories on what is going on in the eurozone. The pro-euro FT says ‘EU signals last resort backing for Greece’ whereas the anti-euro Telegraph quotes a statement made to the German parliament by Rainer Bruederle, economy minister, that there would be "no bail-outs" for struggling debtors and no move to a "European economic government". There is a divergence of opinion in Europe as to what to do. The Germans, as was bound to happen, have decided they don’t want to pay.
The markets went for the Telegraph’s version and hammered Greek debt. It hadn’t helped that an auction of Greek bonds had sold well to hedge funds who believed a story that China was going to invest in Greek bonds. The story seems to have been put out by Athens and its advisors. When they found out they had been conned they sold heavily. Greece now pays 4% more than Germany on its debt and must renew some 50 billion euros by June. It can’t afford these rates, which means it can’t afford the uncertainty being allowed by European leaders to diffuse over the markets.
So what will happen? Simply enough, a country in Greece’s position must either have an external devaluation (of its exchange rate) which Greece can’t do while it is in the euro, or an internal devaluation, which means wages and asset values must go down and taxes must go up. Many people think Greece doesn’t have the political will to do this.
No one knows what would happen if Greece left the eurozone. One idea is that it would create a new internal currency called the drachma, in which all internal transactions would be made. External transactions and the payment of taxes would be in euros. So Greece would be both in and out of the euro. It would be a temporary measure and the Government would undertake to buy back all the drachmas with euros in five years time. If you own a property in Greece it would now be valued in drachma (probably 30% lower) but so would any mortgage you might have.
But what of euro notes issued by Athens? Are they, like the Bank of England’s ‘I promise to pay the bearer..’ an obligation of Greece?. Have you got any?
The number on Greek issued notes begins with a Y. That on German issued notes begins with X.
The markets went for the Telegraph’s version and hammered Greek debt. It hadn’t helped that an auction of Greek bonds had sold well to hedge funds who believed a story that China was going to invest in Greek bonds. The story seems to have been put out by Athens and its advisors. When they found out they had been conned they sold heavily. Greece now pays 4% more than Germany on its debt and must renew some 50 billion euros by June. It can’t afford these rates, which means it can’t afford the uncertainty being allowed by European leaders to diffuse over the markets.
So what will happen? Simply enough, a country in Greece’s position must either have an external devaluation (of its exchange rate) which Greece can’t do while it is in the euro, or an internal devaluation, which means wages and asset values must go down and taxes must go up. Many people think Greece doesn’t have the political will to do this.
No one knows what would happen if Greece left the eurozone. One idea is that it would create a new internal currency called the drachma, in which all internal transactions would be made. External transactions and the payment of taxes would be in euros. So Greece would be both in and out of the euro. It would be a temporary measure and the Government would undertake to buy back all the drachmas with euros in five years time. If you own a property in Greece it would now be valued in drachma (probably 30% lower) but so would any mortgage you might have.
But what of euro notes issued by Athens? Are they, like the Bank of England’s ‘I promise to pay the bearer..’ an obligation of Greece?. Have you got any?
The number on Greek issued notes begins with a Y. That on German issued notes begins with X.
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