Thursday, June 14, 2012

What to look for in a post-Greek euro exit panic

Nobody knows exactly what's going to happen. If a major banking panic happens in Europe next week, US reporters will be scrambling to make some sense of it.

But there are some well-informed speculations and scenarios out there. This is one from Martin Wolf, Soros’ warning on the euro Martin Wolf's Exchange 06/11/2012. Wolf writes:

If a Greek exit were then to occur, a wave of panic seems probable, as even ordinary people decide (rightly) that a euro in an Italian or Spanish bank is definitely not the same as a euro in a German bank. The European Central Bank would need to deal with such capital flight via unlimited lender-of-last-resort operations. Even that might not be enough.

At least two huge problems would arise if the ECB did try.

First, the commercial banks concerned would become zombie institutions, dependent for survival on a drip-feed of loans from their central bank. The credit they could offer would inevitably contract. The affected economies would then spiral into deeper depressions.

Second, a massive lender-of-last-resort operation would generate a further explosive increase in the net creditor position of the Bundesbank within the European System of Central Banks. This would expose Germany to even bigger losses in the event of a break up of the system. Meanwhile, the only way of reversing the flight from peripheral countries would be to make more credible the idea that the eurozone is irrevocable and so that a euro in a Spanish or Italian bank is indeed the same as a euro in a German bank. But noisy arguments in Germany over the Bundesbank’s growing net creditor position would militate strongly against such credibility.
Nick Malkoutzis takes a look at the conservative New Democracy (ND) Party's pitch for the Sunday elections in The Fear Factor in Greek Elections Bloomberg Businessweek 06/13/2012:

"You can’t bet Greece in a game of poker," Samaras told journalists in Athens on Wednesday. His party has staked its hopes on voters’ fear of a return to the drachma. The National Bank of Greece, the country’s largest lender, forecast at the end of May that incomes would shrink by 55 percent, gross national product would plunge by 22 percent, and unemployment would rise to 34 percent if the country were to exit the euro.

Miranda Xafa, a former IMF executive board member who is a candidate for the small pro-business party, Drasi, says concerns about Greece leaving the euro zone will influence the way people vote on Sunday. "I think there are signs the fear factor is having an impact," says Xafa. "You can see it in terms of the deposit withdrawals, but I’ve also had voters telling me they voted for Drasi on May 6 but will support New Democracy in these elections because they fear Greece will go back to the drachma otherwise." The candidate pointed to an opinion poll by Metron Analysis at the beginning of the month indicating that 51 percent of Greeks will vote based on their position on the euro.
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