A day after Portuguese and Greek debt was downgraded, Spanish debt
has been as well. Fears
of contagion, sparked yesterday, are only growing, and the Greek situation remains dire.
Commentators argue that a Greek default would lead to large losses for some European banks--banks
that can't afford that kind of shock. The EU could bail out Greece,
but that might be politically infeasible
in Germany, the country that would have to lead the effort. It's not clear, at this point,
what would solve the problem and keep the instability from spreading.
Just how bad is it? Have a look--the pessimism is pervasive.
- European Response Definitely Not Helping
With the latest news, what do European leaders do? "Spain ... in
time-tested EU fashion--calls an EU Summit to discuss the issue--on May
10, two weeks from now. Considering that Greek bond spreads have risen
15 percent in a matter days, it is hard to take such a proposal
seriously," writes the Peterson Institute's Jacob Funk Kirkegaard.
"The Greek authorities took drastic action to reverse the situation …
by banning short-selling of shares on the Athens stock exchange until
June 28. Should one cry or laugh?"
- Greece's Fate: Latvia and Estonia
Those two countries show what will happen to Greece "if it follows the
advice it gets from the IMF and the European Union," says Mark Weisbrot in the Guardian. In two years, Latvia lost 25% of its GDP.
- 'Idea That the Financial Crisis Was Over Is Being Called Into Doubt,' declares finance blogger and analyst Yves Smith, who later notices,
too, that "a more direct source of trouble" and contagion, previously
overlooked, is "that of bank runs in the countries at risk" (earlier
she and others had focused exclusively on the dangers for European
banks losing money through a Greek default). She also points out that,
in the Great Depression, the "nadir" was the sovereign debt default
phase"...and Europe appears to be approaching sovereign debt default
- 'The Most Terrifying Words I've Seen Written So Far,' Megan McArdle
says of Yves Smith's analysis. She also adds that, "like a lot of
analysts, I don't see much chance that a bailout is going to work [for
- 'I Think I'll Go Hide Under the Table Now,' declares Princeton economist Paul Krugman,
who looks at the mess of bad options surrounding cutting Greece off
from the euro, and the possible bank runs and crises that surround
- A Two-Front War "Well, I don’t know how many other people have noticed, but the Hungarian forint tanked today," announces Edward Hugh
at Credit Writedowns. He sees signs "that contagion is now moving
Eastwards, meaning that EU institutions will now increasingly face a
battle on two fronts."
- To Add to the Mess: Unreliable Figures Douglas McIntyre
looks at mistakes in Spanish unemployment figures: they were actually
higher than previously reported, "which means that its credit crisis
may be getting worse more quickly then believed." Futhermore, "messy
bookkeeping will almost certainly make the problem of 'contagion'
- Greece Must Default, but Maybe It Can't A contributor
to finance analyst site The Pragmatic Capitalist says "I have been
racking my brain for several weeks now attempting to think of a good
outcome in the Greek debt crisis ... there really are no good solutions
here. I keep coming back to the same conclusion--Greece should leave
the EMU and default on their debt." Here's the problem: "I am not so
certain that they will be allowed to default. The BIS shows that
European banks have almost $190B in Greek exposure and would be
unlikely to get more than about 30-40 cents on the dollar--that is an
intolerable hit to already fragile European banks."
- Global Issues Jack McHugh
at Barry Ritholtz's The Big Picture says Credit Suisse's proposal for
the crisis--which "involves hefty amounts of debt monetizing by a
central bank"--makes sense "only if the ultimate goal is to hold the EU
and euro currency together in their current legal structure at all
costs. Other solutions range from kicking Greece and other weak sisters
out of the EU to seeing Germany withdraw and go it alone with a new
deutsche mark." But all of these, "whether they involve a shift in EU
membership, money-printing, or some combination thereof, are
problematic and will lead to further volatility in the markets." What's
more, other countries could soon be facing similar problems: this isn't
about a few banks, but about broader structural flaws based on spending
- A European TARP, Which Germany Won't Support It's a possibility, says Daily Finance analyst Peter Cohan,
but "the biggest contributor to such a program would be Germany, which
is not happy about even participating in a far-smaller Greek bailout."
That makes things messy: "When a country's oxygen supply is cut off,
the question for the rest of the world is how long it will take before
the magnitude of the capital-withdrawal wave from the EU slams the rest
of the world."
- Merkel's Hands Are Tied, notices Business Insider's Joe Weisenthal,
looking at a New York Times piece on the subject. "The world wants her
to act, but big elections are coming up next month that could upset her
coalition, and a Greece bailout will prove toxic."
- 'Spain Is Totally Screwed,' tosses in Matt Yglesias, helpfully. He acknowledges that his is an "amateur opinion."
- 'Eerily Reminiscent of September 2008' Peter Boone and Simon Johnson
post a lengthy, comprehensive analysis of the situation, complete with
explanation of why the eurozone was a bad idea to begin with. They list "three possible scenarios." The
ECB could "somehow buy up all the bonds of troubled eurozone nations.
But this is exactly the process that always and everywhere brings about
high inflation," and the Germans would hate it. "Second, officials
still hope that bond yields for weaker governments widen but then
stabilize. This is bad news for troubled eurozone countries, but they
manage to avoid default ... Call this the trickle down scenario or just
a miracle." The third option is the "most likely"--this is "the
nightmare," where Italian and Spanish bond yields skyrocket, following
Greece and Portugal. "The euro zone will be at risk of massive
collapse." To deal with this, there will need to be "a very sharp fall
in the euro, restructuring of euro zone fiscal/monetary rules to make
them compatible with financial stability, and massive external
liquidity support." One slight hiccup after this massive shock will be
that, in order to have the IMF step in and clean up, they'll have to
switch IMF leadership: "Mr. Strauss-Kahn, the current head of the IMF
today, very much wants to become the next President of France."
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