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European Financial Crisis: Grexit and Return of the Greek Drachma

The newest term coined to describe a dramatic exit by Greece from the Eurozone, Grexit is also blamed for what some already consider a possible Greek bank run. Greek Central Bank Governor George Provopoulos has been quoted as saying that 700 million euros have been withdrawn by depositors just in the last three days beginning May 14, 2012, with another very possible 100 Million more likely, and after having already withdrawn 72 Billion euros since January 2010.

Planning for converting back to the Greek drachma has quietly started at banks since 2009, according to U.S. based ICS Risk Advisors, although the technical task pales in comparison to the legal and practical issues that a Greek exit would pose to the global financial system.

The biggest problem may lie in how much Greece would value the drachma against the euro, with an exchange rate of one drachma to one euro possibly having devastating effects and most likely could not be sustained. Transactions dominated in euros would be thrown into total turbulence due to the change in the make up of the euro, whereas banks with Greek loan exposure may find its assets dramatically reduced in value just from lack of liquidity, not to mention the very real risk of the drachma rapidly devaluating.

Since late 2011, European and U.S. economic woes have already spilled into the Asia-Pacific region, not because Asian banks have much exposure to European debt, but rather because the Asian export engine relies so heavily on the West for growth, which has already shown signs of slowing down.

In the U.S., a full blown European crisis may heavily affect the U.S. money market sector, which Fitch Ratings has estimated to have $800 Billion invested in European banks, so let us not forget about the Reserve Fund that saw its net asset value fall below the sacrosanct one dollar in 2008 and the Federal Reserve had to guarantee the assets of the whole money market industry.

Since May 1, 2012, the Dow has only had one up day that occurred on May 10 with a mere 20 points gain, as the dollar continued its upward climb against the euro and reached $1.27 per euro, its strongest showing since January.

Besides Greece, another area of deep concern is the European block affectionately called the PIIGS, comprised of Portugal, Italy, Ireland, Greece and Spain, with the government of Spain recently and grudgingly having to take a 45% stake in the country’s third largest banking institution, Bankia.

The European crisis a drag on global markets? Worse is still expected to come.

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