The Economist is Late: And Clueless

The Economist is supposed to get here on Fridays.  Didn't get here until today, Tuesday.  Cover story is about Greece.  "Europe's Future is Greeces Hands".   Real title" "We don't have a clue.  They went to press before Sunday's Greek referendum but they reported some Friday poll results hinting that the Greeks might vote yes.  Well, now it's Tuesday and we know the Greeks voted a big NO. 
   They go on to speculate that the big NO means Greece will leave/get kicked out of the Euro zone and this will bring the whole Euro zone down.  They don't say how or why.
   What might happen, is countries that need to do a little money printing to meet payroll, might bail out of the euro.  Right now the Euro is a hard currency, they don't let countries print Euro's to cover budget deficits.  The only thing a Euro zone government can do to cover budget deficits is to borrow on the Euro wide money market.  But when a country does a Greece the market stops lending to them.  Greece is demonstrating what happens when the lenders cut you off.  The banks close, the store shelves go empty, merchants stop accepting credit cards, tourists stop coming, and the economy grinds to a halt throwing everybody out of work.
   Some of the other soft countries may decide to ditch the Euro and run their own currencies.  

Beware of Greeks bearing Debts

The current EU-Greece deal expires on the 30th of June, this coming Tuesday.  The EU wants reforms in Greece leading to a balanced budget.  Which means laying off thousands of Greek government employees (apparently 25% of Greece draws government paychecks), cutting pensions to the more thousands of retired Greek government employees, and hiking taxes.  The Greeks call this "austerity" and the current Greek government was elected  on a "stop austerity" program.  After refusing the last EU offer on Friday, the Greek government is calling a referendum back in Greece about accepting the EU terms.  In short, the Greeks want to keep on spending more money than they take in and have the EU keep on giving them money to spend. 
   We don't know what is going to happen.  The Greeks have two more business days to cave in to the EU.  They might do it.  The EU may fear the turbulence that "Grexit" will cause and keep on subsidizing Greece to avoid trouble.  Or both sides may dig in their heels and the EU cuts off Greek subsidies. 
  In that case, things get really tough in Greece.  It will cause a bank run strong enough to break every Greek bank.  Right now the EU is loaning/giving Greek banks enough Euros to pay withdrawals and keep them afloat.  That may stop anytime now.  When it does, the Greek banks will have to close their doors, they don't have any Euros for depositors to withdraw.  Which means Greeks will loose whatever money they have on deposit.  The bank run is already started and the Greeks are talking about closing all their banks on Monday.
Greece will have to balance the budget, 'cause they cannot borrow money from normal financial sources.  Surely every banker and investor in the world knows how deep underwater Greece is.  In the real world there is zero chance that the Greeks can pay off their current loans, let alone any new loans.  They just don't have the money. 
Then the Greeks will have to do something to meet payroll.  Their choices are to just stop paying all or some of the people on the payroll, or to give them IOU's (aka Drachma) instead of Euros.  The IOUs aren't going to be worth nearly as much as Euros.  So everyone on the payroll takes a haircut, probably a 75% haircut. 
   Question 1:  Do the Greek voters know what they are headed for?
   Question 2:  What will happen to the rest of the Eurozone?  The Europeans (like the Economist)  foresee total disaster.  The Americans aren't paying much attention. 

Watch Greece and the Euro

Anti austerity party Syrisa won the Greek election yesterday.  Greece has been running on bailouts from the EU, mostly Germany, and those bailouts required Greece to shape up it's financial scene.  Syrisa campaigned and won on a platform of dumping the shape up moves.  If they do that, the EU is likely to stop the bailout.  In that case, nobody else, not every brain dead sucker banks, will lend to Greece.  Which means the Greeks will be unable to keep paying on their massive debts, and will be unable to meet payroll at home.  This ought to insure a lively time in the old town tonight, or tomorrow night as well.  The Greeks may decide to drop out of the Euro, and print enough Drachmas to meet expenses.  They may not, because every Greek holding euro's will take a very close haircut if that happens.
  For extra fun, watch the EU get all twisted out of shape.  They shouldn't, Greece is petty cash compared to the EU GNP, but listening to Europeans talk, you would think that Grexit is the end of the euro itself.