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Busch: Der Spiegel's Greek Tragedy

Friday, 6 May 2011 | 3:24 PM ET

On Friday, German magazine Der Spiegel dropped a bomb on the global financial markets with a story headline: "Greece considers exit from Euro Zone."

Immediately, the Euro versus the US dollar fell 100 points as the markets assessed the damage that could be wrought by this action.

According the article, German Finance Minister Wolfgang Schäuble staff prepared a paper detailing what would happen if it Greek pulled out.

Here's what Der Spiegel reported:

"It would lead to a considerable devaluation of the 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 has 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."

The Parthenon in Greece
Scott E. Barbour | Getty Images
The Parthenon in Greece

Given that Greek 2 year notes are yielding over 20%, Greece would not be able to return to the global bond markets and fund their debt at this time.

This means that without the bailout fund liquidity, Greece would be in default right now. Given that, they must negotiate a new facility beyond the end of the current facility that ends in 2013.

It should surprise no one that there are secret negotiations going on between Greece and the EU/IMF over the extension and terms of the bailout.

To me, the leak of this story tells me that the Greeks are not happy with the terms they are getting and are attempting to put pressure on the other parties. The potential disastrous result that would occur from such a pull-out is the gun to the head of the EU/IMF to soften and extend the terms. For the markets, there is no choice but to sell the Euro currency, the European financial stocks and European debt to cover the potential massive losses that would occur.

In a market that already is selling Euros due to the ECB dovish statement, the currency is getting hit hard and isn't likely to find a bottom for some time.....even if there are denials.

  • European Officials Deny Greek Euro Exit Report

Tune In: Andrew Busch will be discussing this topic and more tonight on CNBC's "Money in Motion Currency Trading" which airs on Fridays at 5:30pm.

Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a contributor to CNBC's Money in Motion Currency Trading.You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch .

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