Drachma of course is the old currency Greek citizens used to deal with. Could they be heading back to it soon? Maybe!

Mr. Orwell phone you office!

From the UK Telegraph, Ambrose Evans-Pritchard penned this yesterday [our emphasis]:

“’Recent developments have, perhaps, increased the risk of secession (however modestly), as well as the urgency of addressing it as a possible scenario" said the document, entitled Withdrawal and expulsion from the EU and EMU: some reflections.

The author makes a string of vaulting, Jesuitical, and mischievous claims, as EU lawyers often do. Half a century of ever-closer union has created a ‘new legal order’ that transcends a ‘largely obsolete concept of sovereignty’ and imposes a ‘permanent limitation’ on the states’ rights.

Those who suspect that European Court has the power pretensions of the Medieval Papacy will find plenty to validate their fears in this astonishing text.

Crucially, he argues that eurozone exit entails expulsion from the European Union as well. All EU members must take part in EMU (except Britain and Denmark, with opt-outs).

This is a warning shot for Greece, Portugal, Ireland and Spain. If they fail to marshal public support for draconian austerity, they risk being cast into Icelandic oblivion. Or for Greece, back into the clammy embrace of Asia Minor.

The spread between Greek and German bonds is widening. We also noticed something else, the single-currency known as the euro, seems to be tracking nicely on the widening spread, as you can see in the charts below. The spread is the top chart and EURUSD bottom chart.

Greek/German Spread Correlation (below) vs. EURUSD (next chart):

Click on image to enlarge!

Click on image to enlarge!

Mr. Market isn’t cooperating with the dream of Greek fiscal austerity. Back to Mr. Evans-Prichart:

“Greece cannot afford such a premium for long. The country must raise €54bn this year – front-loaded in the first half. Unless the spreads fall sharply, the deficit cannot be cut from 12.7pc of GDP to 3pc of GDP within three years. As Moody’s put it, Greece (and Portugal) faces the risk of “slow death” from rising interest costs.”

…and the European Central Bank is now facing explicitly the problem that comes from a single interest rate for economies with differing levels of labor productivity, fiscal discipline, and business cycle performance. Things that are expected to exist for a viable common currency zone.

“As Portugal, Italy, Ireland, Greece, and Spain (PIIGS) slide into deflation, their ‘real’ interest rates will rise even higher. ‘It is tantamount to hiking rates in the already weak PIIGS,’ he said [Mr. Stephen Jen from BlueGold Capital]. This is the crux. ECB policy will become ‘pro-cyclical’, too tight for the South, too loose for the North.”

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