Greek banks just announced they are closing for a week starting today, Monday, June 29. Closure prevents Greeks operating on the panic they feel by pulling their money out of Greek banks. Capital controls prevent them from moving that money to safety in another country and currency. They are allowed to withdraw limited amounts of euros from ATMs, and long queues of Greeks appeared almost immediately when the bank closings were announced. Economics Professor Christine Ries is an expert on world financial markets.
Bank closures were triggered by the European Central Bank’s decision to deny emergency funding to the Greek government. The government can’t pay its debts due to the International Monetary Fund (IMF) June 30. That €1.6 billion is payment on debt assumed in a settlement of the last bailout. If the IMF and the other countries that bailed out Greece last time don’t agree to new terms for repayment, Greece will be forced to drop out of the Eurocurrency group and return to issuing and ‘supporting’ its own separate currency – formerly the drachma.
Greek depositors? Their Euro deposits and savings will become drachmas, which will devalue significantly and instantaneously. Retirement savings and bank accounts will lose a large share of their value overnight. That’s why, as expected, people got in line today to withdraw as many Euro as they could to put under their mattresses.
Without finding a way to repay, the drachma will be forced out of the Euro, triggering a worldwide set of reactions with serious consequences for the rest of us. Letting one country drop out of the Euro opens the door for others, mainly the southern European countries with large government deficits, high government spending and unrealistic government benefits and pensions. These countries were formerly “weak currency countries” with projections for permanent high inflation, continuing currency devaluation and high interest rates.
These weak currency countries see big increases in unemployment and very weak economic growth (or shrinkage) as their economies spiral downward.
For investors and strong currency countries, there are more “basket cases” of concern and the whole international monetary system becomes much more volatile. (Immediately after announcement of Greek bank closures, stock markets in London and the U.S. fell 2.0 percent and 1.2 percent, respectively.) Germany suffered the most with stocks falling 3.5 percent and big German bank stocks falling 5-6 percent.
In the U.S., interest rates affecting fixed rate mortgages and 401ks are more volatile. Who needs this?
Will the Germans and French step in yet again and bail out the Greeks? Without another bailout and a program to keep Greece, Italy, Portugal, Spain, etc. in the common currency discipline, everyone suffers. But, Germany and France suffer the most.
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