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May 6, 2011

Adio, European Union?

Is Greece planning a new drachma and an exit from the EU?

"Dire consequences if Athens were to drop the euro"

Trapped into an impossible situation by a combination of union pressures and protests from across the the social sphere, some are saying that Papandreou "feels he has no choice."

Der Spiegel online has the story

" Sources told SPIEGEL ONLINE that Schäuble intends to seek to prevent Greece from leaving the euro zone if at all possible. He will take with him to the meeting in Luxembourg an internal paper prepared by the experts at his ministry warning of the possible dire consequences if Athens were to drop the euro.

"It would lead to a considerable devaluation of the new (Greek) domestic currency against the euro," the paper states. According to German Finance Ministry estimates, the currency could lose as much as 50 percent of its value, leading to a drastic increase in Greek national debt. Schäuble's staff have calculated that Greece's national deficit would rise to 200 percent of gross domestic product after such a devaluation. "A debt restructuring would be inevitable," his experts warn in the paper. In other words: Greece would go bankrupt. "

The Greek government has denied the Der Spiegel claims. (Yahoo News)

"Speculation has swirled in recent days and weeks that Greece will have to eventually restructure its debt, by stretching out payments or even reducing principal. Most economists say the country will not be able to service its debt in the long term, which stands at more than euro340 billion, more than 140 percent of economic output. Both the government and EU officials have repeatedly denied that a restructuring is on the cards."

This has been the predicted outcome since the original credit downgrade in December 2009: Greece would have no choice but to back out of the European Union and return to a more easily manipulated financial situation with its own currency printing option. The ECB European Central Bank has been buying new Greek debt, and stands to lose tens-of-billions in euros if Greece leaves, and that doesn't even count all of the older debt that was taken on prior to the current contretemps.

On the other hand: Many people are counting that this is a bluff to help leverage the Greek position vis-a-vis the coming IMF/euro examination of Greek finances next week. Though it would isolate Greece even further, in the financial sense, by exiting the euro, the eurozone banks would all instantly face a hemorrhage of red ink as a result. Some (like the cnbc report) are saying the threat to leave is all part of the game, and Greece needs the next infusion of bailout money, but wants more steering rights over what's ahead down the road as older bonds continue to mature, i.e., "restructuring" on older debt.

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