måndag 16 januari 2012

Linde CEO says Germany should mull euro exit-paper

Germany should consider leaving the euro if efforts to impose fiscal discipline upon indebted euro zone countries fail, the head of industrial gases firm Linde (LING.DE) told German weekly paper Der Spiegel.

If we do not succeed in disciplining crisis countries, Germany needs to exit," said Reitzle who was previously a board member at carmaker BMW (BMWG.DE) and head of Jaguar and Land Rover.

Reitzle said the euro zone is unlikely to break up completely but Greece is not in a position to service its debt.
"The country is not in a position to restructure itself in such a way that it can remain in the currency union," Reitzle said.


Greece will default – as it should. The bondholders will get roasted – as they should – for making bad investments.

The laws of capitalism will be allowed to do their thing. Debtors and creditors will pay – as they both should – with both parties sharing the cost.Whether this leads to Greece being pushed out of the euro remains to be seen.

An opportunistic play by a desperate Greek government might be a total default, followed by the reintroduction of a new currency and then the restart button is hit. Initially, it would be an international pariah, but over time it would recover.

You might think it sounds radical, but it is straight from the IMF’s own adjustment handbook. In fact, the favoured IMF remedy to debt crises is partial/agreed default, followed by a rapid devaluation of the currency, which is then fixed at a new, much lower level.

The more aggressive approach is simply an amplified version of what is likely to happen anyway. The present policy calls for an internal devaluation plus some default. Why not an explicit external devaluation with total default, which gets you to the same place but a lot more quickly?

One of the reasons why there will be huge opposition in Europe to the Greeks going down this road is because it means the banks that lent money to Greece would get nothing or very little.On the other hand, internal devaluation would mean that they would take a haircut and then slowly bleed Greece dry for the rest of the money. But when you think about Greece’s position, this makes no sense. Greece has a current account deficit of ten per cent of GDP.

This means it must borrow an amount equal to nearly ten per cent of its GDP to pay for its current level of imports. If yet more money goes abroad to feed interest payments for foreign banks, it will have to borrow yet more just to make its current account balance. This is why getting the biggest default now must look attractive from Athens.

The realisation of this Greek position has led to the downgrading of France because the French banks are more exposed to Greece than any other foreign banks. All this news is simply the latest phase in Europe’s ongoing debt crisis. It is clear that, however it ends, the credit/banking industry will never be the same again.


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