Thursday, May 31, 2012

A mini-catalog of all the damage a Greek exit from the euro or a eurozone breakup could do

Bloomberg News provides a description of the range of possible-to-probable results of a Greek exit from the euro: Simon Kennedy, Greek Exit Aftershocks Risk Reaching China 05/28/2012:

Beyond the euro area, major trading partners such as the U.K., Switzerland and nearby emerging economies including Romania’s could be hurt as demand slows. Their currencies probably would rise against the euro, making exports less competitive. China’s biggest investment bank says that nation could see its weakest growth in more than two decades.

Even if the dollar surges, the U.S. may be more insulated given signs of a rebound in its domestic economy -- at 8.1 percent in April, the jobless rate is down from a peak of 10 percent in October 2009 -- and the fact that just 13 percent of its exports head to the euro area. Capital flooding into a perceived safe haven may also hold down interest rates.

Still, BofA Merrill Lynch estimates U.S. bond and stock markets each account for a third of global capitalization, leaving them prone to a European shock. Greek elections helped wipe almost $3 trillion from worldwide equities this month.

Beyond the euro area, major trading partners such as the U.K., Switzerland and nearby emerging economies including Romania’s could be hurt as demand slows. Their currencies probably would rise against the euro, making exports less competitive. China’s biggest investment bank says that nation could see its weakest growth in more than two decades.

Even if the dollar surges, the U.S. may be more insulated given signs of a rebound in its domestic economy -- at 8.1 percent in April, the jobless rate is down from a peak of 10 percent in October 2009 -- and the fact that just 13 percent of its exports head to the euro area. Capital flooding into a perceived safe haven may also hold down interest rates.

Still, BofA Merrill Lynch estimates U.S. bond and stock markets each account for a third of global capitalization, leaving them prone to a European shock. Greek elections helped wipe almost $3 trillion from worldwide equities this month.

If the U.S. economy is pulled down it may complicate President Barack Obama’s re-election bid, said [economist Barry] Eichengreen. Obama said May 21 that what happens in Greece has an impact in the U.S. and called for “greater urgency” from European leaders.

"The election will turn on the economy and the economy is significantly affected by Europe," Eichengreen said. "The longer it remains unresolved and the more volatility it creates the worse it is for Obama." [my emphasis]
The headline writer on the following story seems to have gotten a little carried away in trying for rhymes for Sharon Smyth's and Neil Callanan's report, Spain Delays And Prays That Zombies Repay Debt: Mortgages 05/29/2012:



"Spain has engaged in a policy of delay and pray," Echavarren said in an interview. "The problem hasn’t been quantified by anyone because there is huge pressure not to tell the truth."
The Economy Ministry says that Spanish banks have 184 billion euros of developers' loans and assets that are "problematic," while the remaining 123 billion euros are performing. The need for more reserves to cover losses on the loans can’t be ruled out, Nomura International analysts Daragh Quinn and Duncan Farr said in a May 14 report. If Spain took losses on developer loans like Ireland did, Spanish banks would need 8.9 billion euros under the best case to 76.5 billion euros of additional provisions in the worst scenario, Nomura estimates.
Spain's Bankia firm is already in critical condition:

Bankia, which Spain nationalized this month, said on May 25 it will seek 19 billion euros of state funds after it made 5.5 billion euros of provisions for non-developer loans, mostly home mortgages and company borrowing. Banco Santander SA (SAN) and Banco Bilbao Vizcaya Argentaria SA (BBVA), Spain’s biggest lenders, were among 16 of the country’s banks downgraded earlier this month by Moody’s Investors Service, which cited a recession and the increase in non-performing loans to real-estate companies.
The Reuters video at this link, Market Pulse: Spain bank plan doomed, Troika bailout looms 05/28/2012, talks about how Bankia will likely need "Troika" (EU, IMF, ECB) assistance to salvage Bankia. This is a more optimistic report from the day before, 05/28/2012, Breakingviews: Bankia's bailout is a mixed blessing:



As this editorial from El País, La catástrofe de Bankia 29.05.2012 mentions, the government's actions so far in assuming the bad credits for Bankia have been a factor in Spain's high bond interest rates at the moment. M. Veloso and M. Cuesta report in Tres alternativas para pagar la factura de Bankia ABC.es 29.05.2012 that Spain's conservative government has basically three alternatives open at the moment: borrow more through Spanish bonds; get an injection of capital from the ECB; and, get rescue funds from the IMF or the EU.

The Bankia problem is yet another reminder that the main financial problem in Europe is the weakness (under-capitalization) of European banks, not the sovereign debt of Greece or the other countries.

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