A Greek exit from the euro is now a “base case” scenario for economists and is set to trigger a flight to safety for nervy investors
Financial markets were braced for their worst period of turmoil since the height of the eurozone crisis three years ago, after Greeks chose to overwhelmingly reject the bail-out terms of their creditors, throwing the country on a collision course with the eurozone.
The prolonged period of uncertainty is expected to roil European equities and see investors flock to safe haven assets such as US and German government bonds.
As the farcical negotiations between Greece and its creditors unfold ahead of a June 5 IMF payment and as Alexis Tsipras is forced to spread false hope just to avoid a terminal bank run, a picture of the Greek endgame has emerged.
We’ve discussed the political implications of both an agreement or a Grexit and we’ve also taken an in-depth look at what a missed IMF payment means for the country’s EU creditors. On the political front, the troika is intent on sending a strong message to leftist political parties (such as Spain’s Podemos and Portugal’s “ascendant” socialists) that using the threat of a euro exit as a way to extract austerity concessions is not a viable negotiating strategy. What this amounts to is an attempt on the part of the “institutions” to subjugate the political process to economics. In terms of skipping a payment to the IMF — who, as a reminder, effectively paid itself earlier this month by allowing Greece to tap its SDR reserves to pay the bills — there are a number of cross acceleration concerns which you can review by referring to the following graphic: Continue reading
Italy plunged deeper into political chaos this weekend after Beppe Grillo, the quixotic former comedian who holds the balance of power in parliament, suggested that the country may have to abandon the euro and return to the lire.
The rebel comic’s warning came amid a growing rebellion among grass-roots supporters of his Five Star Movement, with 150,000 signing a petition calling for him to open up dialogue with the centre-Left Democratic Party, the biggest force in parliament. Continue reading
Some of us have been talking it over, and here’s what we think the end game looks like:
1. Greek euro exit, very possibly next month.
2. Huge withdrawals from Spanish and Italian banks, as depositors try to move their money to Germany.
3a. Maybe, just possibly, de facto controls, with banks forbidden to transfer deposits out of country and limits on cash withdrawals.
3b. Alternatively, or maybe in tandem, huge draws on ECB credit to keep the banks from collapsing.
4a. Germany has a choice. Accept huge indirect public claims on Italy and Spain, plus a drastic revision of strategy — basically, to give Spain in particular any hope you need both guarantees on its debt to hold borrowing costs down and a higher eurozone inflation target to make relative price adjustment possible; or:
4b. End of the euro.
And we’re talking about months, not years, for this to play out.
Full article: Eurodämmerung (NY Times)