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.
Once we hit step one there on this road, the rest falls apart very, very quickly. Massive bank runs in Spain and Italy will not be isolated to just those two countries, but Ireland, Portugal, and who know how many others. The EU would have to step in and the result would be trying to stand athwart a flash flood of debt yelling "What's all this then?" It's unknown if Greece will even be able to make its May 15th bond payment. If Greece misses it, all bets are off.
Mass European chaos at the height of the US election season, in the July-October timeframe. Our economy would not exactly remain unscathed. The largest factor in the elections may be completely out of the President's control.
By the way, as Digby points out, California's economy is larger than that of Spain. They're facing a $16 billion shortfall and the answer there will almost certainly be more crippling austerity.
A sobering thought indeed. And it all starts with Greece.
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