Thursday, June 28, 2012

Will Greece Leave the EU Monetary Union?

The unscheduled meeting between several euro zone finance ministers, Eurogroup head Juncker, EU Monetary Affairs Commissioner Rehn, ECB President Trichet and a few other senior officials was important. It marks the official recognition that the year-old Greek aid package is not working. This does not mean that Greece is about to exit monetary union, rather it means officials are going back to the drawing board and re-evaluating their options. It raises the significance of next week's (May 16) summit of European finance ministers.

Drawing on my analysis of other debt crisis, I have consistently argued that Greece (and Ireland, and possibly Portugal) will have to restructure their debt. In a recent post "Catalysts for Changing FX Drivers", I argued European officials would soon have to make some difficult decisions because Greece needs more funds and it would most likely not be able to effectively tap the capital markets next year as the IMF/EU assistance program had assumed.

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