What's Next for Greece?
04/24/2015 12:01 am EST
Over the next month, the situation in Greece could reach a turning point and MoneyShow's Jim Jubak explains what he thinks is likely to happen.
For the week ahead, well, let's talk about Greece, not because anything is really going to happen this week but because we're seeing so much speculation about what might happen.
On April 20, the Greek government ordered all of the local governments to take all of their cash reserves, the penny that they had saved because they knew a bill was coming in a month, all of that money had to be transferred to the Greek Central Bank, the National Bank of Greece, and that gave the national government about $2 billion euros of new cash that they can use to pay out the debt payment, the interest payment they've got to the IMF, pensions, salaries, etc. so it now looks like Greece is probably going to get through May.
There's a big meeting scheduled for the 24th of April. Nobody expects anything to happen at that. The finance ministers are going to get together and basically going to tell Greece, well, if you want your $7 billion euros of new money, you've got to do X, Y, Z, and Greece is going to say, well, you know, we're not going to do X, Y, Z, so that's where this will all be.
The question really is what happens, where are we headed? Is there a trajectory that people can guess?
Right now, pretty much nobody thinks that whatever is going to happen in Greece is going to affect anybody else so the day of this sort of seizure of local cash reserves, the yield on the three-year Greek note went up to about 28%, huge.
The euro, on the other hand, which you would think people might be worried about holding the euro if Greece is falling apart, the euro actually rallied slightly and moved up about 0.2% against the dollar, so no one is really worried about Greece sort of slopping over but there's still the whole issue of what's going to happen in Greece.
My take is that Greece is going down a path that leads to a Greek exit, that the big reason for Greece not to exit the euro is it would cause massive cash flows out of Greece into other euro countries.
You'd have to slap on capital controls. That's always been sort of unthinkable.
You'd certainly have to exit the euro to do that because it's not allowed in terms of the euro agreement, so that's always been sort of like, well, Greece won't exit because that's unthinkable.
But, if you've gone far enough down the path so if your seizing cash from local governments, the next step seems to be that you would then order cash from public companies or public agencies to be deposited with the National Bank too.
If you do that, you're not very far away from slapping on capital controls and the more things you do that are kind of extreme and out of the ordinary, the smaller jump moving to capital controls is going to be, and to the point where you contemplate capital controls, you can contemplate an exit from the euro.
And I think that's where the Greek policy is headed, if there is a Greek policy, and the big question is whether anybody in the current Greek government has an end game strategy at all or are they simply buying time for, well, for something.