The beginning of the endgame?

by Idéfix Wed May 16, 2012 9:04 pm

With every passing day, it looks more and more likely that Greece will find its way out of the euro. Now the market is behaving as if that outcome is inevitable: money is moving out of the country at an accelerated pace. As depositors take their money out of Greek banks, the political establishment has essentially abdicated responsibility for stabilizing the economy by its failure to form a government after last week's elections. And the European Central Bank as essentially closed its doors to Greek banks, ruling out an ECB-led stabilization of the banking system. It is difficult to imagine how this capital outflow can be stemmed, and how Greek banks can be saved, without the Greek government bailing them out -- and exiting the eurozone. The fascinating thing about this euro tragedy is that it unfolds at such a slow pace; that may be about to change as the Greek financial system edges towards the cliff.

http://www.nytimes.com/2012/05/17/business/global/greek-crisis-aggravated-by-flight-from-banks.html?_r=1

by Petrichor Wed May 16, 2012 9:09 pm

Question really is...what is the impact of a Greek ouster from the euro.

Will PIIGS follow suit? What is the macro scenario in Europe?

How is London poised ?

by Idéfix Wed May 16, 2012 9:21 pm

atcg wrote:Question really is...what is the impact of a Greek ouster from the euro.

Will PIIGS follow suit? What is the macro scenario in Europe?

How is London poised ?

I think Spain and Portugal will be very tempted to exit as well. If Greece manages to do a half-way decent job of the exit to a new drachma, Spain and Portugal will likely be out in a couple of years as well. It is hard to imagine smaller economies that are in the fourth or fifth straight year of recession toeing the austerity line from Germany which is experiencing growth. ECB won't see expansionary monetary policy because Germany won't stand for that. And Germany will insist on a contractionary fiscal policy as well. So the macro policy picture is one of the interests of Germany directly opposed to those of the struggling economies. Italy is the uncertain commodity in all this; my own opinion is that they are very likely to exist as well. Essentially the euro will become a northern European currency, linking France, Germany and Benelux.

Perhaps if Greece horribly botches the transition and ends up deepening and prolonging its recession -- which it well may, given its political paralysis -- then Spain and Portugal may take caution from that and go along with further austerity and the euro. In the final analysis, it will likely be as if southern Europe benefited from its link to Germany in the good times (through lower borrowing costs that helped them live it up), and when bad times came, they decided to cut loose and chart their own course.

I think London will be fine either way. Whether Greece exits or not, confidence in the euro as a currency is already shaken, so Frankfurt can no longer aspire to replace London as the European financial hub. Greek/Spanish/Portuguese exit or no exit, London's position as the main European financial center is more secure than it has been in a decade.

by truthbetold Wed May 16, 2012 9:23 pm

Euro core is feeling it is better prepared for greek exit. It is a near certain event. Consequences are probably unclear to any one. Greece is jumping in to fire from the frying pan. PIIGS bond spread could go wild. Gold(surprisingly) is tanking. Dollar seems to be safe haven. A lot could change by tomorrow. However endgame has to involve a much bigger player say Italy or in few years France.

by truthbetold Wed May 16, 2012 9:30 pm

Obama could not catch a break. One major disaster after another.

by Idéfix Wed May 16, 2012 9:40 pm

Yeah, this has the potential to hurt Obama in a big way. And there's nothing he can do about it. If the transition to a new drachma is relatively smooth, the impact on the US economy should not be catastrophic. But going by how the Greeks have managed the show so far -- they keep going from one tragedy to another bigger one -- I am worried Europe will suffer as a whole, which means the impact on the US will be sizable.

by Kris Thu May 17, 2012 12:22 am

truthbetold wrote:Euro core is feeling it is better prepared for greek exit. It is a near certain event. Consequences are probably unclear to any one. Greece is jumping in to fire from the frying pan. PIIGS bond spread could go wild. Gold(surprisingly) is tanking. Dollar seems to be safe haven. A lot could change by tomorrow. However endgame has to involve a much bigger player say Italy or in few years France.

>>>>Greece may be small potatoes relatively speaking, but the crisis shows up the underlying flaws in this model i.e. disparate economic histories, attitudes and modes of financial governance thrown together into one quasi unit. The market will not react well to Greece, but this may pass if the rest of the community can hobble along. A couple of other exits are bound to happen, but if this gets spaced over time, the news may not be as bad as a sudden decision to separate. BTW, I think maybe Spain and Portugal as more likely possibilities than Italy. As for greece itself, this is going to be a tough road, unless as someone said the world suddenly decides to drastically increase its olive consumption.

by Kris Thu May 17, 2012 12:24 am

atcg wrote:Question really is...what is the impact of a Greek ouster from the euro.

Will PIIGS follow suit? What is the macro scenario in Europe?

How is London poised ?

>>>London may even get extra oomph out of this as a financial center. 'Fog in channel, continent cut off!'- that sort of thing.

by Idéfix Thu May 17, 2012 12:30 am

Kris wrote:BTW, I think maybe Spain and Portugal as more likely possibilities than Italy.

I agree. Italy still has hazy memories of its former delusions of grandeur, what with its G-8 membership, its attempts to block Germany from Security Council permanent membership, and its role in the Treaty of Rome which set the euro ball rolling half a century ago. So it will be harder for their national pride to exit the euro in disgrace than it will be for Spain and Portugal. But in this volatile climate for the euro, political instability translates to brinkmanship and greater chances of an exit; and in terms of political instability it is hard for any European country to beat Italy's post-war history.

by Kris Thu May 17, 2012 12:51 am

panini press wrote:
Kris wrote:BTW, I think maybe Spain and Portugal as more likely possibilities than Italy.
I agree. Italy still has hazy memories of its former delusions of grandeur, what with its G-8 membership, its attempts to block Germany from Security Council permanent membership, and its role in the Treaty of Rome which set the euro ball rolling half a century ago. So it will be harder for their national pride to exit the euro in disgrace than it will be for Spain and Portugal. But in this volatile climate for the euro, political instability translates to brinkmanship and greater chances of an exit; and in terms of political instability it is hard for any European country to beat Italy's post-war history.

>>>Anything is possible at this juncture and we will have to see what the blow-back is going to be on the Greece exit and how its managed. yes, there is still a lot of vainglory involved. Aside from this, I thought Italy's problem was high debts but not necessarily being as much an economic basket-case than the other piigs (of course, we are talking degrees). I haven't kept up on where Italy stands, so my impression could be wrong.

by Kris Thu May 17, 2012 12:57 am

Kris wrote:
truthbetold wrote:Euro core is feeling it is better prepared for greek exit. It is a near certain event. Consequences are probably unclear to any one. Greece is jumping in to fire from the frying pan. PIIGS bond spread could go wild. Gold(surprisingly) is tanking. Dollar seems to be safe haven. A lot could change by tomorrow. However endgame has to involve a much bigger player say Italy or in few years France.

>>>>Greece may be small potatoes relatively speaking, but the crisis shows up the underlying flaws in this model i.e. disparate economic histories, attitudes and modes of financial governance thrown together into one quasi unit. The market will not react well to Greece, but this may pass if the rest of the community can hobble along. A couple of other exits are bound to happen, but if this gets spaced over time, the news may not be as bad as a sudden decision to separate. BTW, I think maybe Spain and Portugal as more likely possibilities than Italy. As for greece itself, this is going to be a tough road, unless as someone said the world suddenly decides to drastically increase its olive consumption.

>>> To clarify: I mean the separation takes place a couple of years from now or more. I didn't mean the separation itself should be a prolonged process. That would be a disaster.

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