The Kroog Versus Greek Fire

Paul Krugman gets a little confusing today.  He says yesterday's major malfunction in the stock market had nothing to do with Greece, but at the same time he admits the euro is done as a currency.  Seems to me if Krugman's got the Euro pegged, if you'll excuse the macroeconomics pun there, the bond traders do too.  And while the stock market recovered two-thirds of that blowout, the bond market most certainly did not.

So, is Greece the next Lehman? No. It isn’t either big enough or interconnected enough to cause global financial markets to freeze up the way they did in 2008. Whatever caused that brief 1,000-point swoon in the Dow, it wasn’t justified by actual events in Europe.

Nor should you take seriously analysts claiming that we’re seeing the start of a run on all government debt. U.S. borrowing costs actually plunged on Thursday to their lowest level in months. And while worriers warned that Britain could be the next Greece, British rates also fell slightly.

That’s the good news. The bad news is that Greece’s problems are deeper than Europe’s leaders are willing to acknowledge, even now — and they’re shared, to a lesser degree, by other European countries. Many observers now expect the Greek tragedy to end in default; I’m increasingly convinced that they’re too optimistic, that default will be accompanied or followed by departure from the euro.

In some ways, this is a chronicle of a crisis foretold. I remember quipping, back when the Maastricht Treaty setting Europe on the path to the euro was signed, that they chose the wrong Dutch city for the ceremony. It should have taken place in Arnhem, the site of World War II’s infamous “bridge too far,” where an overly ambitious Allied battle plan ended in disaster.

Kroog is right about one thing:  It's that bond market you need to watch, not the stock market.  And the bond market has been screaming that Greece and the euro are dead and gone.  Yesterday the stock market screamed too.

And I mean that literally.