It’s a mess. Greece threatens to leave Euro and Germany/France respond by discussing throwing the Greeks out of the EU/Euro.

Greece will not leave the EU because it is not possible – There are no provisions to expel a country without amending the Maastricht treaty and that takes time and luck to get through a complex maze. Negotiating an exit would require re-writing an EU-wide agreement and re-writing the treaties of the EU, which in turn requires referendums in several member states, where any single government could veto the move. There is no formal way for a country to leave the Euro, meaning it would have to default on its terms of membership or other countries could effectively expel it by withholding support. Messy.

If Greece decided to leave the euro, it would also have to quit the European Union, according to the terms of the EU’s treaties, was asserted by the European Commission on Thursday. To leave the EU, the country would have to notify EU leaders that it wants to do so and negotiate with them the terms of its exit, the treaty says. EU laws would stop applying to the exiting country, even without negotiated leaving terms, after two years from notifying the leaders.

While there have been more than 60 cases of countries leaving single currency blocks, many quite successfully, leaving the euro zone and therefore the EU would most likely also trigger tariffs on all exports to the EU. The small part exports play in the Greek economy makes the trade benefit from the currency devaluation small and makes the effect of tariffs small, but offsetting. Assuming the EU insists Greece’s leaving the Euro means leaving the EU, Greece loses EU structural funds paid by the 27-nation bloc to countries where the average wealth is lower than the EU average. Greece has received just 4.9 billion euros of 20.2 billion euros of EU development funds earmarked for it from 2007 to 2013 and it would obviously not get any money in the next seven year budget.

Now while leaving the euro, default and explicit default does lead to lower interest payments on government debt, and lower asset prices that could also result in foreign capital inflows to pick up those assets, and while this scenario in Argentina in 2001-02 caused output to rise sharply, Greece may not recover from the capital outflow that is certain to occur, unless greed by the outside of country rich for cheap assets post devaluation overcame any patriotic urge to punish those that mess with the EU (I doubt Germans will forgive – anything).

Even the point that getting your own currency means you can just print the money to pay off your debts just means high inflation that is not viable for any longer periods.

So the risks are inflation, devaluation, banking collapse – but the austerity package may cause these. The Greeks taking euros out, a run on the Greek banking system, means the banking system will freeze up and no one will spend their euros or convert them to the Drachma because of fear of a possible further devaluation of the new currency.

So Greece could be much better off leaving the Euro – and indeed the EU – or it could collapse – and Germany is staring Greece in the eye and in its best Clint Eastwood voice is saying “Are you feeling lucky”?

Meanwhile it is interesting to see who owns Greek debt in the private sector affected by the 50% haircut (Germany excludes itself and the IMF and indeed all other than private investors from the haircut – and the private haircut was made voluntary). As you can see the 50% haircut destroys many banks in Greece – so perhaps why not roll the dice?

Bank…Country..Net Sovereign Exposure to Greece..€m % of equity….% of total assets

Agricultural Bank Greece 10000 na 31
Hellenic Postbank Greece 5371 590 31
Piraeus Greece 8700 248 15
NBG Greece 19400 218 16
EFG Eurobank Greece 7900 196 9
Alpha Bank Greece 4600 110 7
Marfin Popular Cyprus/Greece 2943 72 7
Bank of Cyprus Cyprus 2000 73 5
Dexia Belgium 3470 39 1
BPI Portugal 501 29 1
DZ Bank Germany 1195 11 0
Commerz Germany 2900 27 0
Postbank Germany 1200 21 1
BPCE France 1185 14 1
BCP Portugal 718 13 1
BNP Paribas France 5046 8 0
Landesbank Baden Germany 1389 7 0
Soc Gen France 2500 6 0
ING Holland 2425 6 0
HSH Nordbank Germany 196 5 0
Erste Austria 550 4 0
Norddeutsche Landesbank Germany 197 3 0
KBC Belgium 600 3 0
NLB Slovenia 25 2 0
Raiffeisen Austria 115 2 0
Rabobank Holland 638 2 0
Landesbank Hessen Germany 78 2 0
Royal Bank of Scotland United Kingdom 1088 1 0
Casa France 631 1 0
Bayer Landesbank Germany 198 1 0
Unicredit Italy 801 1 0
West LB Germany 103 1 0
Dekabank Germany 46 1 0
Deutsche Germany 400 1 0
SEB Sweden 57 0.5 0.02
Caixa Geral de Depositos Portugal 56 1 0
BBVA Spain 293 1 0
HSBC United Kingdom 800 1 0
Banco Popolare Italy 89 1 0
Jyske Bank Denmark 92 1 0
Barclays United Kingdom 388 1 0
Allied Irish Banks Ireland 41 0 0
Santander Spain 300 0 0
Intesa Italy 200 0 0
OP-Pohjola Finland 21 0 0
Monte dei Paschi Italy 35 0 0
UBI Banca Italy 25 0 0
SNS Bank Holland 98 na na
Jupiter Spain 64 na na
Breogan Caixanova Spain 41 na na
BASE Spain 40 na na
Bank Of Valletta Malta 9 na na
Banca Civica Spain 8 na na

TOTAL…………………… 91,766 8.7 4.4