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Window to Keep Greece in Euro Closing

There has been no shortage of bad signs in the market this week. Investors seeking safety rushed into Treasury bonds, sending yields to near-record-low levels. It's Greece and the worry that a forced exit from the eurozone would have on the rest of Europe.

Jeremy Glaser 04.06.2012


There has been no shortage of bad signs in the market this week. Investors seeking safety rushed into Treasury bonds, sending yields to near-record-low levels. It's Greece and the worry that a forced exit from the eurozone would have on the rest of Europe. This fear isn't misplaced. There is a very real chance that Greece will need to leave the eurozone, sending further ripples from Greece and upsetting the global financial pot.

Why Now?
Greece's economy hasn't suddenly become weaker during the last few weeks; it's been in a deep recession for years. The key problem is political. In order to keep the aid from the rest of Europe flowing, Greece needs a government that is credibly able to agree to the austerity measures that Germany and the European Central bank are demanding. But it doesn't seem that a stable government is going to appear anytime soon. Elections from a couple of weeks ago were inconclusive and followed the recent European trend of rejecting incumbents and, more broadly, austerity. A fresh Greek vote is scheduled for June, and no one knows who (if anyone) will emerge with the power to form a governing coalition in parliament.

The one thing that does seem likely is that the previously mainstream parties that supported the earlier austerity efforts are likely to do poorly, and any new government is likely to be much more skeptical of implementing further reforms. So the stage is set for another round of tension-filled negotiation between Greece and its lenders in the next few months. Despite some of the hard-line rhetoric, the outcome of these talks is hardly a fait accompli. What's said in the heat of an election campaign is usually more of an opening offer than a final word. Given that Germany and the European Central Bank still have a vested interest in keeping the eurozone together, they might end up being more flexible in their demands. Add in the wild card of how the new French president Francois Hollande will influence negotiations and the stage is set for an unpredictable discussion.

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About Author

Jeremy Glaser  Jeremy Glaser is the Markets Editor for Morningstar.com.

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