Spiegel Online reports that Greece Considers Exit from Euro Zone.

(emphasis mine) [my comment]

Athens Mulls Plans for New Currency
Greece Considers Exit from Euro Zone
05/06/2011 05:46 PM
By Christian Reiermann

The debt crisis in Greece has taken on a dramatic new twist. Sources with information about the government's actions have informed SPIEGEL ONLINE that Athens is considering withdrawing from the euro zone. The common currency area's finance ministers and representatives of the European Commission are holding a secret crisis meeting in Luxembourg on Friday night.

Greece's economic problems are massive, with protests against the government being held almost daily. Now Prime Minister George Papandreou apparently feels he has no other option: SPIEGEL ONLINE has obtained information from German government sources knowledgeable of the situation in Athens indicating that Papandreou's government is considering ABANDONING THE EURO AND REINTRODUCING ITS OWN CURRENCY.

Alarmed by Athens' intentions, the European Commission has called a crisis meeting in Luxembourg on Friday night. The meeting is taking place at Château de Senningen, a site used by the Luxembourg government for official meetings. In addition to Greece's possible exit from the currency union, a speedy restructuring of the country's debt also features on the agenda. One year after the Greek crisis broke out, the development represents a potentially existential turning point for the European monetary union -- regardless which variant is ultimately decided upon for dealing with Greece's massive troubles.

Given the tense situation, the meeting in Luxembourg has been declared highly confidential, with only the euro-zone finance ministers and senior staff members permitted to attend. Finance Minister Wolfgang Schäuble of Chancellor Angela Merkel's conservative Christian Democratic Union (CDU) and Jörg Asmussen, an influential state secretary in the Finance Ministry, are attending on Germany's behalf.

'Considerable Devaluation'

Sources told SPIEGEL ONLINE that Schäuble intends to seek to prevent Greece from leaving the euro zone if at all possible. He will take with him to the meeting in Luxembourg an internal paper prepared by the experts at his ministry warning of the possible dire consequences if Athens were to drop the euro.

"It would lead to a considerable devaluation of the new (Greek) domestic currency against the euro," the paper states. According to German Finance Ministry estimates, the currency could lose as much as 50 percent of its value, leading to a drastic increase in Greek national debt. Schäuble's staff have calculated that Greece's national deficit would rise to 200 percent of gross domestic product after such a devaluation. "A debt restructuring would be inevitable," his experts warn in the paper. In other words: Greece would go bankrupt.

It remains unclear whether it would even be legally possible for Greece to depart from the euro zone. Legal experts believe it would also be necessary for the country to split from the European Union entirely in order to abandon the common currency. At the same time, it is questionable whether other members of the currency union would actually refuse to accept a unilateral exit from the euro zone by the government in Athens.

What is certain, according to the assessment of the German Finance Ministry, is that the measure would have a disastrous impact on the European economy [and the US financial system].

"The currency conversion would lead to capital flight," they write. And Greece might see itself as forced to implement controls on the transfer of capital to stop the flight of funds out of the country. "This could not be reconciled with the fundamental freedoms instilled in the European internal market," the paper states. In addition, the country would also be cut off from capital markets for years to come.

In addition, the withdrawal of a country from the common currency union would "seriously damage faith in the functioning of the euro zone," the document continues. International investors would be forced to consider the possibility that further euro-zone members could withdraw in the future. "That would lead to contagion in the euro zone," the paper continues.

Banks at Risk

Moreover, should Athens turn its back on the common currency zone, it would have serious implications for the already wobbly banking sector, particularly in Greece itself. The change in currency "would consume the entire capital base of the banking system and the country's banks would be abruptly insolvent." Banks outside of Greece would suffer as well [ESPECIALLY US banks]. "Credit institutions in Germany and elsewhere would be confronted with considerable losses on their outstanding debts," the paper reads.

The European Central Bank (ECB) [AND THE FED] would also feel the effects. The Frankfurt-based institution [and the New York Fed] would be forced to "write down a significant portion of its claims as irrecoverable." …

In short, a Greek withdrawal from the euro zone and an ensuing national default would be expensive for euro-zone  countries [all the countries that bailed out Greece (including the US)] and their taxpayers. Together with the International Monetary Fund, the EU member states have already pledged —‚¬110 billion ($159.5 billion) in aid to Athens -- half of which has already been paid out.

"Should the country become insolvent," the paper reads, "euro-zone countries [AND THE US] would have to renounce a portion of their claims."

Greek Default would be a disaster for the US

A year ago, I wrote about the “Greek debt crisis”, and predicted (correctly) that the US would bailout the country because a Greek default would be a disaster for the US.

Greek Default would be a disaster for the US

1)  The Greek debt crisis highlights the collapse of the traditional G7 growth model (ie: the US growth model) of high indebtedness and a low share of exports in the economy.

2)  A GREEK DEFAULT WOULD BE A DISASTER FOR THE US.  It would be THE FIRST CONFIRMED SOVEREIGN DEFAULT OF A WESTERN US-STYLE ECONOMY, and it would send investors running from the debt of all similar Western economies, especially US treasuries.

…

Conclusion:  … In the case of the "Greek debt crisis", the US will cave, and the IMF will provide enough money to bailout Greece for a couple of months. …

I also explained why The US can't allow a Greek default.

The US can' t allow a Greek default

1)  It has been reported by main stream media outlets that a collapse of Greece or the Euro itself would have little impact on the United States. THAT STATEMENT COULD NOT BE FURTHER FROM REALITY.

2)  American corporations are very intertwined with the Euro.

3)  More importantly, Wall Street firms are 'in deep' with derivatives, currency swaps, and bonds of various flavors tied to Europe.

4)  Expect a US bailout of Greece through the IMF (to hide what is going on from the already furious US taxpayer).

And as expected…

THE US TAXPAYER BAILED OUT GREECE

New York Post reports that we bailed out Greece.

We're bailing out Greece
But US taxpayers shouldn't be
By MIKE PENCE & CATHY MCMORRIS RODGERS
4:16 AM, May 8, 2010

US TAXPAYERS WILL BE HELPING TO FOOT THE BILL FOR THE GREEK BAILOUT, via the Interna tional Monetary Fund. And if the Obama administration doesn't draw a clear line, Uncle Sam may soon be on the line for even more and larger European "rescues."

The Greek government, with its high taxes and profligate spending to support large bureaucracies and social programs, is bankrupt. Its bonds have been downgraded to junk status.

As economist Milton Friedman once said, "If you put the federal government in charge of the Sahara Desert, in five years there'd be a shortage of sand." Greece has run out of sand.


REUTERS — Bad investment: With rioters and protesters out to stop Greece's budget cuts, there's a good chance the bailout won't end the crisis.

Concerned that the fiscal damage could spread throughout the EU and the world, other European Union members and the IMF have pledged $145 billion to bail out Greece. And since the United States is the largest contributor to the IMF budget, our government will be funneling billions of American tax dollars to Greece.

No one wants to see Greece fail -- the economic stability of Europe is important. But US taxpayers have funded bailout after bailout, and our country faces a debt crisis of its own.

Our unemployment rate stands at nearly 10 percent. The public debt now stands at $9.2 trillion. The Congressional Budget Office predicts that America's debt held by the public will reach 90 percent of gross domestic product within 10 years under President Obama's budget. Without dramatic spending restraints, America is on a path like the one that led to Greece's financial catastrophe.

In fact, Federal Reserve Chairman Ben Bernanke recently warned congressional leaders that, without significant spending restraints, the United States would soon face a debt crisis like the one in Greece.

It is unfair and unwise to ask US taxpayers to fund bailouts for EU countries while America racks up huge deficits.

And it's unlikely that Greece will be the last major EU member to seek financial help. High-debt Portugal, Spain and Italy could all face similar crises soon. Piero Ghezzi, an economist at Barclay's Capital, estimates that Spain may need a $450 billion bailout. Italy might well need more.

The United States pays 17 percent of total member contributions to the IMF; No. 2 Japan provides just 6 percent. That entitles us to a claim on the overall IMF balance sheet, not a share of any specific loan -- but it still means that our "share" of the $40 billion IMF package for Greece is equivalent to $6.8 billion.

Last year, Congress passed another $100 billion line of credit to the IMF -- funds the IMF said will go "to forestall or cope with an impairment of the international monetary system or to deal with an exceptional situation that poses a threat to the stability of that system."

In other words, the "too big to fail" doctrine is being expanded to an international level -- with the United States as the primary stakeholder.

While a $145 billion bailout will temporarily dull Greece's pain, it's still not clear that Athens will carry out the necessary vast cuts in government spending; Greece and the EU may be setting themselves up for an even larger financial crisis down the road.
…

IT WASN' T JUST GREECE

Biggovernment.com reports that the U.S. Taxpayers on the Hook for Portugal Bailout.

U.S. Taxpayers on the Hook for Portugal Bailout
Apr 18th 2011
by Rep. Cathy McMorris Rodgers (R-WA)

Recently, Portugal officially requested a $116 billion bailout from the European Union and the International Monetary Fund. This makes Portugal the third European nation to seek such a bailout in the past year (Greece got $157 billion; Ireland $122 billion). What most people don' t realize is that the U.S. is the largest contributor to the IMF. Therefore, U.S. taxpayers are paying for Portugal' s bailout which —“ like the earlier bailouts of Greece and Ireland —“ was caused by too much government spending and borrowing.

Last year, here at BigGovernment.com I warned how the Obama Administration was making a Greek bailout more likely BY AGREEING IN ADVANCE THAT U.S. TAXPAYERS WOULD HELP FOOT THE BILL. Later, the IMF set up a $356 billion bailout fund for European governments with the consent of the Obama Administration—“ even though the fund will likely cost U.S. taxpayers between $50-100 billion and possibly more —“ all without a Congressional vote or consultation.

On April 29, 2010, Rep. Mike Pence (R-IN) and I wrote a letter to Treasury Secretary Tim Geithner warning of the dangers of U.S. participation in a Greek bailout. “The Obama Administration needs to understand that bailing out Greece will not solve Greece' s problems,” I said at the time. “It will only create a moral hazard that gets America more involved in the gathering storm of European bailouts.” That storm has since consumed Ireland and Portugal and others may be on the way.

At a time when the U.S. government is borrowing $5 billion every day on top of a $14 trillion national debt, does it really make sense for us to borrow even more money (much of it from China) to help bailout Europe? After all, the European crisis was caused by too much spending and borrowing, and that crisis will not be solved by more spending and borrowing.

While the IMF refuses to provide a reliable number, we estimate that AMERICA'S CONTRIBUTION TO A PORTUGUESE BAILOUT IS EQUAL TO WRITING A CHECK WORTH $600 FOR EVERY MAN AND WOMAN IN PORTUGAL. This largesse makes it more likely that larger counties —“ particularly, Spain and Italy —“ will be standing in line for U.S. tax dollars tomorrow…

My reaction:  A Greek default would be worse for the dollar then the euro (both would suffer).

1)  Greece is considering withdrawing from the euro zone and reintroducing its own currency.

2)  This would lead to a considerable devaluation of the new (Greek) domestic currency against the euro.

3)  the currency could lose as much as 50 percent of its value, leading to a drastic increase in Greek national debt

4)  Greece would go bankrupt.

5)  The measure would have a disastrous impact on the European economy and the US.  (The US financial system has enormous exposure to this.)


Conclusion:  Expect another IMF-lead bailout, delaying the day of reckoning another few months/weeks.