Greek Fire, Part 13

At this point the question goes from "Will Greece be bailed out?" to "Can the Euro survive this mess?" Everyone I've been looking as had their doubts.  First, Roubini:

Europe's current bailout plan for Greece "is not going to work" because "Greece is nearly insolvent," well-known economist Nouriel Roubini told CNBC Wednesday.

"A restructuring of its debt is going to be necessary," said Roubini, RGEmonitor.com chairman and NYU professor. 

A collapse of the Greek economy could have domino effect among other weak eurozone countries—including Portugal, Spain, Italy and Ireland, he said. 

“Suppose you have a disorderly collapse of Greece, two things will happen," he added. "Financial institutions holding Greek debt—mostly European—will have massive losses. Secondly, a contagion from Greece to Portugal to Spain to Italy to Ireland will have a domino effect." 

Eventually, debt increases and risk aversion is going to drive down the asset prices globally, as it happened yesterday and today.”

Then Krugman:

Think of it this way: the Greek government cannot announce a policy of leaving the euro — and I’m sure it has no intention of doing that. But at this point it’s all too easy to imagine a default on debt, triggering a crisis of confidence, which forces the government to impose a banking holiday — and at that point the logic of hanging on to the common currency come hell or high water becomes a lot less compelling.

And if Greece is in effect forced out of the euro, what happens to other shaky members?

(More ops after the jump...)


Yglesias too:

Certainly my amateur opinion is that if a country can leave the Euro without that prompting a disaster (even if the only reason that’s possible is that a disaster is already under way), then that would look pretty compelling to me. The Euro is a questionable idea in economic theory, but it’s actually proven to be a worse idea in practice. Rather than try to run monetary policy that would be suitable for the median European economy, the European Central Bank has insisted on trying to run monetary policy that would be suitable for Germany. And not even suitable for Germany in general, but “suitable for Germany according to hard money fanatics.” That’s probably bad for Germany, but there’s certainly no reason to think it’s appropriate for southern Europe. Consequently, we’ve seen deflationary bias from the ECB for years and as Nick Rowe points out the ECB is likely to respond to this crisis with measures that prompt further disinflation.

El-Erian also says the Greek Fire will consume Europe:

The disorderly market moves of recent days will place even greater pressure on the balance sheets of Greek banks and their counterparties in Europe and elsewhere. The already material risks of disorderly bank deposit outflows and capital flights are increasing. The bottom line is simple yet consequential: the Greek debt crisis has morphed into something that is potentially more sinister for Europe and the global economy. What started out as a public finance issue is quickly turning into a banking problem too; and, what started out as a Greek issue has become a full- blown crisis for Europe.

Felix Salmon backs up both El-Erian and Krugman's opinion:

It’s impossible for Greece to devalue without defaulting, given that all of its debt is in euros. El-Erian doesn’t talk about devaluation in his article, but it’s clearly still a possibility. A default, meanwhile, is increasingly looking like it’s probable in the short-to-medium term, and near-certain in the long term. Countries have come back from high debt-to-GDP ratios in the past. But not with interest rates at these kind of levels, and only through devaluation.

Meanwhile, Tyler's Durden's take is worth paying attention to:

Obvious 101 from Reuters:

German Fin Min: Crisis Largely Over In Europe and Germany
German Fin Min: If Greek Budget Consolidation Succeeds, No Tax Money Will Be Lost
German Fin Min: Without Consolidation In Greece We Will Have Unforeseeable Market Consequences
German Fin Min: Failure With Greece Would Put Euro In Question
German Fin Min: Cannot Throw Greece Out Of Eurozone

It's over - the excess debt/GDP terrorists have won, and Moral Hazard is now a global phenomenon. There will be no more failures anywhere. In other words, all your stock profits will come straight from your taxes.

And he's got a point too.  No matter how badly the Germans want out of this, letting Greece fold and default is going to pretty much cause an international banking panic.  But...what if the Paulson Plan European Edition doesn't stop Greece from defaulting?

Then things get really, really messy.  El-Erian, and Roubini assume we're all going to find out.  Krugman and Salmon seem to think we're headed for that cliff as well, or there's a possibility for Germany to say nein to any more bailout cash.

Will the Greek Fire consume not just Europe but the world too?