Euro wedged between a rock and a hard place over Greece

February 11, 2015 11:27 AM

Fears over moral hazard behind Eurzone's tough stance

But Greece's hand isn't entirely weak The rest of the Eurozone is well aware that should it depart it will damage the euro's credibility and raise the prospect of other members being able to leave. That would open up a new front for speculators and make the task of keeping other members in the club harder when they came under attack.

However, putting moral hazard aside for a moment, the right thing to do would be to restructure and even write-off some of Greece's debt. It currently stands at 320 billion – 175% of Gross Domestic Product. The brutal austerity programme has placed the country into a five-year 1930s style depression with 25% unemployment and it has lost a quarter of its GDP.

Lazard Group, which is advising Greece, reckons $100 billion of the country's debt should be written off. From a purely economic perspective they are correct. 

Debt restructurings and write-offs are common and do work. If a country follows sensible fiscal and economic policies after the restructuring, the economy recovers, credit ratings improve and it can once again borrow – often at lower rates of interest because the debt burden is more manageable.

But "moral high ground" is likely to prevail on this occasion. The fear being that other bailed out Eurozone countries will also demand debt restructurings and one Irish minister has already said as much about his country deserving the same treatment if Greece benefits from debt forgiveness.

Former U.S. Federal Reserve chairman Alan Greenspan believes that eventual 'Grexit' is inevitable. He also thinks the Eurozone itself is likely to break-up unless it becomes a super-state. Public appetite for such a move is steadily diminishing.   

In the meantime, the euro is likely to carry on stumbling from one crisis to another. However, the single currency may yet get some relief if the Eurozone manages to stage an even economic recovery. It would ease many of its internal strains for a while.


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About the Author

Justin Pugsley is the forex and gold markets analyst for New Zealand-based trading platform provider MahiFX. He is a keen student of markets, economics and history. Prior to working with MahiFX, Justin worked for a number of leading media organisations such as Thomson-Reuters and Dow Jones/Wall Street Journal.