GREECE TO BE AMERICA'S MODEL IF DEBT CEILING RAISED!

Submitted by: Donald Hank

Taipan Daily’s Weekly Wrap-Up: Greece Debt Crisis Enters Next Phase
by Ryan Cole, Contributing Editor, Taipan Daily

Rumors swirl as Athens faces mounting problems.

The next leg down in Europe's sovereign debt crisis is upon us.

On May 6, Der Spiegel broke the story that Greece was mulling departure from the euro and, possibly, the EU.

Why? Quite simply, Greece is on its way to bankruptcy, one way or another. Despite the bailout the country received last year, Greece's debt is simply too great to hold up under pressure. It's small surprise that Greek debt was just downgraded to B, from BB-, by Standard & Poor's.

Greek government bonds are already commanding north of 15% interest. Cost-cutting measures have gone about as far as they can go without a total shutdown, with citizens demonstrating nearly every day in Athens. And still, Greece is hemorrhaging cash much faster than it can pay it back.

Let's be clear: Greece's leaving the euro is an extreme long shot. It's true -- there are a number of pundits who have always believed that the euro couldn't survive a true crisis, and they're pointing to this as the first brick to fall.

Not so fast.

You Can't Take Your Ball and Go Home

First, there are a number of legal issues involved in unilaterally backing out from the euro. Other European countries might not accept it -- and it's not clear if Greece would be able to override them.

Greece might be forced to leave the European Union in order to withdraw from the euro -- and that's not something anyone wants. While the euro is about finance, the EU covers everything from trade agreements to work agreements and defense alliances. To leave would be catastrophic.

Furthermore, Greece's new currency would immediately be devalued -- up to 50%, according to some European ministers. What is currently a debt level at 100% of GDP would immediately become debt of 200% of GDP -- not a step in the right direction.

Caught in the crossfire would be Greece's banks -- nearly all of which would become insolvent overnight.

In other words, leaving the euro would be tantamount to fiscal suicide. There's no reason to believe Greece will actually go down this path.

A Crafty Feint?

The country, however, might be floating a trial balloon in order to coax the rest of Europe into giving it more help. Europe, after all, would also suffer if Greece left the euro. Faith in the currency would plummet -- as would its value -- and the long-term viability of the Union would be called into deep question.

At the bargaining table, one could hear Greek ministers saying, we're going to default on our debt, one way or another. How about you help us prevent that -- or we'll hurt you in the process?

For those who think that the euro is in deep trouble, this is another important stepping-stone toward dissolution. But it's far from the end game.

For those of us who simply think that the sovereign debt crisis hasn't finished yet -- and that has little to do with which currency the debt is held in, be it the euro, dollar, or yen -- this is the opening of the next chapter in what could quickly be a series of debt defaults that ripple around the world.

What happens next in this crisis? Who knows -- but pay close attention to Greece. Its fate will give us a clue about what may happen next with other countries -- be it Ireland, Portugal, or much bigger fish.