Calamos Supports Greece
GreekReporter.comGreek NewsWall Street and Washington Bracing for Greek Euro Exit

Wall Street and Washington Bracing for Greek Euro Exit

It looks like even the gods are angry at Greece now

With growing speculation that Greece will – sooner or later – be forced to leave the Eurozone of the 17 countries using the euro as a currency because of its financial crisis and the rise of parties opposed to austerity measures, financial markets in the United States are preparing for the worst – and could yet be caught unprepared despite their expectations.

Greeks go to the polls on June 17 amid fears of euro supporters that a new government could be ruled by parties who want to renegotiate, or renege on the terms of $325 billion in two bailouts from international lenders. If that happens, some analysts believe that the money pipeline will be cut off and that a domino effect could further weaken other Eurozone countries such as Portugal, Spain and Italy, and even topple the financial bloc itself.

Greece would quickly run out of cash, be unable to pay workers, pensioners or its bills, face social unrest or anarchy, and would have to return to the drachma or find some temporary currency. American exposure to weakened European banks who hold Greek bonds could rattle Wall Street and affect the U.S. Presidential campaign.

Willem Buiter, a noted euroskeptic and chief economist for Citi, told Agence-France-Presse (AFP) that there is a “50-75 percent” chance Greece will leave the Eurozone, possibly in early 2013, although others have suggested it could happen sooner, and leave Greece with less than two days to make the transition.

“This is not just an event now, this has been going on for a very long time, well beyond two years,” said Hartmut Grossman of ICS Risk Advisors, commenting on how banks have prepared, AFP reported. “You look at your exposure, you look at reducing it as much as possible in critical countries, you put hedges in place, swaps, portfolio hedging,” he said. “I think a lot of it is priced in, a lot of people have exited Greece.”

According to Bank for International Settlements data, US banks’ direct exposure to Greece now stands at just $4 billion. Japanese investment bank Nomura has been simulating a Greek exit for six months. One of its currency analysts, Jens Nordvig, predicted Greek exit spillovers for the United States via currency markets, a slump in Greek import demand, credit losses and regional politics. Most of these are manageable thanks to two years of preparations, said Grossman. But two extremely large, interlinked question marks remain: indirect contagion and market panic. “I think the mechanics for this are probably in place, but how crazy are the markets going to go?” He added: “There has been a lot of work done to deal with it, but there is a sort of quantum imponderable, that I think nobody knows really what is going to happen.”

Here the specter of the collapses of AIG and Lehman Brothers looms large. While each had significant problems in the run-up to 2008, it was ultimately market rumors that spurred their terrifyingly quick demise, and Greece got a taste of that with a mini-run on its underfunded banks, which have been weakened by being included in a Private Sector Involvement (PSI) deal in which the Greek government imposed 74 percent losses on investors to write down its debt by $134 billion. Earlier this month, Greeks were withdrawing $1 billion a day from banks.

With European banks still exposed to Greece to the tune of $65 billion, and indigenous problems in Spain, Italy, Portugal and Ireland, panic could easily cause banks to doubt their counter parties and freeze lending. The disastrous results could quickly spread through the international financial system.

The U.S. Treasury Department won’t talk about Greece leaving the Eurozone but AFP said preparations are being made, just as European Union officials said they have been making plans, although they denied it. Phillip Swagel, a former Treasury and Federal Reserve official, said that if a US bank looks to be in trouble, the government will step in, using powers gained since the last financial crisis. “For now, though, the US government must just watch in amazement at the inability of the Europe to deal with its situation.”
(Sources: AFP)

See all the latest news from Greece and the world at Greekreporter.com. Contact our newsroom to report an update or send your story, photos and videos. Follow GR on Google News and subscribe here to our daily email!



Related Posts