Greece Alarm Bell

Consider this a bit of a placeholder post as I note that the situation with Greece’s debt unfolding this week is a much more important piece of financial and economic news than anything happening in the Senate with financial regulation or at the White House’s fiscal summit.

Take a look at this and this from Felix Salmon for a hint of how grim the situation is. Tyler Cowen says “the basic problem . . . is that several European economies have been pretending to be much wealthier than they really are and to make financial plans on that basis.” I think a better way of putting it might be that the entire Eurozone system was structured around the assumption that a whole bunch of countries that mostly aren’t Germany could all viably run a monetary policy designed by and for Germany. The results have been predictably disastrous, and I think worsened by an unwillingness of German policymakers or the German public to recognize their own role in this. If Germany had been subjected to 10 years of Spanish-run monetary policy its economy would have all kinds of “structural” problems too and many decisions would look “irresponsible.”

At any rate, the question now is what kind of way forward exists. It appears that either Europe’s monetary union needs to be undone or else a fiscal union needs to be forged. But neither is possible! And as I’ve been trying to emphasize, the Eurozone is a more important trade partner for the United States than the much-more-discussed China. A meltdown over there seems sure to have consequences here and not good ones.

Here’s an accessible view of the risks from Yves Smith:


So the whole idea that the financial crisis was over is being called into doubt. Recall that the Great Depression nadir was the sovereign debt default phase. And the EU’s erratic responses (obvious hesitancy followed by finesses rather than decisive responses) is going to prove even more detrimental as the Club Med crisis grinds on.

The VIX posted its biggest one-day increase since 2008 but its level of 22 is positively tepid compared to crisis norms. Portugal, whose total debt to GDP is higher than Greece’s, is under pressure as bond spreads continue to widen. Hungary’s premier-in-waiting stated that the country, which was bailed out last year, will not be able to meet IMF fiscal targets and should widen its deficit even more to stoke growth. Traders went into risk-aversion mode, with emerging market and junk bonds also suffering. And as we mentioned, quite a few people in London expect a significant devaluation of the pound after their elections.

A further source of trouble is political. If the euro continues on its expected slide and the pound is devalued, the dollar’s strength will put a major dent in the US ambitions to increase exports. Moreover, the rise in the greenback relative to other currencies will no doubt make China much more reluctant to revalue the renminbi against the dollar.