The Three Stages of the Eurozone Crisis--Rebecca Wilder:
On to the Germans. What they are doing is actually quite striking: offering a bailout in order to appease markets so that international investors will pick up the Greek bill (never was going to happen anyway); and then telling markets that bond investors in Europe will take a haircut so that international investors won't pick up the Greek bill. I guess the light-bulb finally went off that there is a contagion brewing here because bunds are tight, while all Peripheries are wide...We’re in crisis mode – the calm before the storm. I see the Eurozone disaster happening in three waves:
The Holy Roman Eurozone--Nick Rowe:
It's not just Greece; I now think the Eurozone has gone. Not gone completely; it will live on in some form, just like theRoubini on Greece and Spain--Felix Salmon:
Holy Roman Empire, a shadow of the original, comprising maybe Germany, France, and Benelux.
Nouriel’s base case, then, is Argentina 2001: after all, Greece has a much higher debt-to-GDP ratio, much higher deficit-to-GDP ratio, and much higher current-account deficit than Argentina had back then. And if that’s the base case, there’s no way that Greek debt should be trading anywhere near its current levels.
Of course, this being Nouriel, it goes downhill from there: if Greece is worse than Argentina, he says, then
Spainis worse than Greece. Its housing bubble and bust has left the banking sector much weaker than Greece’s; its unemployment situation, especially with the under-30 crowd, is much worse than Greece’s; and the cost of any Spain bailout would be so much more enormous than the cost of a Greek bailout as to be almost unthinkable. The only thing that Spain has going for it is that it isn’t quite at the edge of the abyss yet; if it gets its political act together and implements tough fiscal and structural reforms now, it can save itself. But clearly no one saw that happening, given Spain’s political historyover the past 20 years.
There’s no good news here. The least bad course of action for
Greece, in Nouriel’s eyes, is some kind of coercive yet orderly debt restructuring, which keeps the face value of the debt unchanged but which reduces coupons and pushes out maturities. And an exit from the euro. Alternatively, the ECB steps in and cuts interest rates so low that the euro gets pushed down towards parity with the dollar, which would accomplish something similar without nearly as much pain.
[I]t is becoming apparent that the international community may need to come up with a much larger sum to backstop not just Greece, but also Portugal and
“The number would be huge,” said Piero Ghezzi, an economist at Barclays Capital. “Ninety billion euros for Greece, 40 billion for Portugal and 350 billion for Spain — now we are talking real money.” Mr. Rogoff says that the I.M.F. could commit as much as $200 billion to aid Greece, Portugal and Spain, but acknowledges that sum alone would not be enough. In fact, analysts at
Goldman Sachssuggest that Greece will need 150 billion euros over a three-year period.
What a growing number of investors suggest is really needed is a “shock and awe” figure, enough to convince the markets that peripheral European economies will not be left to fail.