[ed. There might have been a bit of cautious optimism last week when news of a Euro Zone agreement (tentative) emerged, but now everything has fallen into chaos. Even if Greece was, as it appeared, headed for a certain default, regardless of whatever austerity measures and outside controls were applied in the short term, European Central Bank and Euro Zone banking partners would have preferred an orderly default that extended over a period of several months (to unwind leverage and raise capital at higher market valuations), but that doesn't look likely now. And, even if Prime Minister Papandreou's government is overthrown and everyone goes back to the original game plan, Greece's citizenry has been energized and the resulting turmoil could be frightening. Then there's Italy and Portugal, not to mention our own investments in European debt. Can you say contagion?]
[UPDATE - and, for or a simple explanation of how contagion works, read this:]
Unlikely Happy Ending
by Veronique de Rugy, NY Times
The Greek prime minister has announced that he will seek the opinion of his people by referendum about the price they would have to pay in the form of austerity measures to get a second European Union bailout. Does this mean the end of the euro zone? Well, at this point a happy ending for the euro block seems increasingly unlikely.
First, contrary to what the headlines led us to believe, the details of the agreed-upon E.U. bailout package weren’t set in stone. That means it was unlikely that this deal would actually have saved the euro anyway. Second, the referendum would give the Greek people the option to choose between more austerity measures directed by the E.U. bailout or to roll the dice and continue on the current path. At this point, it looks like they will likely reject austerity. That vote — or even the signal sent by the referendum announcement — then increases the risk of a default.
As George Mason University Professor Tyler Cowen noted a few weeks ago, a default probably means an exit from the euro zone. Also, leaving the euro zone could, in theory, benefit Greece. Cowen explains that the default may reinforce the idea that the government isn’t that committed to its banking system, which, “will lead to a continuing exodus of deposits from Greek banks. It’s not clear how the Greeks can stem that additional pressure.”
Under one scenario, pro-actively leaving the euro could alleviate the pressure and, as Cowen says, allow Greece to start “the process of Greek bank recapitalization, long and painful though it might be.”
Of course, there is a slight chance that a transparent Greek default and euro exit (followed by Portugal?) may help preserve the monetary union for those countries that remain in it. It wouldn’t be without months of tremendous market turmoil but in the end, Europe could stand on firmer grounds without the constant fear that the Euro-Agamemnon is imminent.
Unfortunately, this is unlikely. Today, Greece is still borrowing money to pay for its daily consumption; a default would mean even more austerity measures, which could lead to severe social unrest if not worse. And then we have Italy. No reason to be optimistic there (120 percent debt-to-G.D.P. ratio and a 10-year yield was up to 6.31 percent). The collapse of Greece followed by Italy could quickly bring the whole union down.
Sadly, we may soon have the answers to our questions.
Read more:
More from the BBC:
[UPDATE - and, for or a simple explanation of how contagion works, read this:]
Unlikely Happy Ending
by Veronique de Rugy, NY Times
The Greek prime minister has announced that he will seek the opinion of his people by referendum about the price they would have to pay in the form of austerity measures to get a second European Union bailout. Does this mean the end of the euro zone? Well, at this point a happy ending for the euro block seems increasingly unlikely.
There is a slight chance that a Greek default and euro exit may help preserve the monetary union, but the collapse of Greece followed by Italy could bring it down.
As George Mason University Professor Tyler Cowen noted a few weeks ago, a default probably means an exit from the euro zone. Also, leaving the euro zone could, in theory, benefit Greece. Cowen explains that the default may reinforce the idea that the government isn’t that committed to its banking system, which, “will lead to a continuing exodus of deposits from Greek banks. It’s not clear how the Greeks can stem that additional pressure.”
Under one scenario, pro-actively leaving the euro could alleviate the pressure and, as Cowen says, allow Greece to start “the process of Greek bank recapitalization, long and painful though it might be.”
Of course, there is a slight chance that a transparent Greek default and euro exit (followed by Portugal?) may help preserve the monetary union for those countries that remain in it. It wouldn’t be without months of tremendous market turmoil but in the end, Europe could stand on firmer grounds without the constant fear that the Euro-Agamemnon is imminent.
Unfortunately, this is unlikely. Today, Greece is still borrowing money to pay for its daily consumption; a default would mean even more austerity measures, which could lead to severe social unrest if not worse. And then we have Italy. No reason to be optimistic there (120 percent debt-to-G.D.P. ratio and a 10-year yield was up to 6.31 percent). The collapse of Greece followed by Italy could quickly bring the whole union down.
Sadly, we may soon have the answers to our questions.
Read more:
More from the BBC:
