February 19, 2012

Should the Euro Zone sell Greece as soon as possible?

"Cut your losses short" is something every good trader knows and uses when trading. It means that when you have bought a stock and the stock decreases in value, you should sell it as soon as possible. Some traders do the opposite: They add more when the stock is moving down. But what happens if that stock is Enron and the stock never moves up again? The trader Paul Tudor Jones understands this and he has a picture on his wall saying "Losers Average Losers."

Source: Street Stories

The world is currently facing a similar problem with Greece. What would have happened if the Euro Zone had cut its losses short and removed Greece from they Euro Zone in 2009 when Greece began to show a loss? Now, two years later, the Euro Zone has added more money to its losing position while still having the same problems.

Positives with Greece leaving the Euro Zone
  • Greece might need more money in the future. Adding more money to Greece and force Greece to cut its spending might not help long-term
  • Greece returns to its old currency: The benefits of a weaker currency might help Greece to recover. A weaker currency might increase the exports to other countries helping Greece to make more money

Negatives with Greece leaving the Euro Zone
  • Greece returns to its old currency: A currency devaluation might be useless, since the benefits are being eroded by inflation
  • The cost for Greece might be 40-50 percent of GDP the first year because of internal problems when changing from Euro back to its old currency. This is because of bank-runs when people are running to the banks to save what they have before the value of their savings are decreasing because of the new weaker currency
  • Other "weak" countries in the Euro Zone might follow - such as Spain or Portugal. US banks have an exposure of 478 billion euros to Greece, Ireland, Italy, Portugal and Spain
  • Germany might lose 20-25 percent of GDP the first year because German banks have been lending money to Greece

Source: CNBC