AMP Thesis ( as discussed at our seminars ) : The Euro Crisis will go on for years and the uncertainty and headlines haunt the financial news and thus your investment choices for years :
German Finance Minister Wolfgang Schaeuble dares Greece to quit the euro, investors and economists are mapping out what he and fellow policy makers need to do to save the single currency if his bluff is called.
Emergency lending and bond buying from the European Central Bank coupled with recapitalizations and deposit insurance for lenders and broader powers for the region’s rescue fund are among the prescriptions for insulating Spain and other cash- strained nations from what Citigroup Inc. calls a “Grexit.”
Pressure for contingency plans are mounting as Greece’s electoral quagmire forces euro-area officials to publicly revive the once forbidden topic of whether a nation can leave the single currency. Schaeuble told today’s Rheinische Post newspaper that the euro area could handle a Greek departure as “the risks of contagion for other countries of the euro zone have been reduced.”
“Any exit would need to be done as part of a package to reduce disruptions,” said Mohamed El-Erian, chief executive officer at Newport Beach, California-based Pacific Investment Management Co., which manages the world’s largest bond fund. “At this stage, it’s very easy to find things wrong with any approach that is proposed.”
The risk is if Greece leaves and the save-the-euro response flops the world economy could face a sovereign-version of Lehman Brothers Holdings Inc.’s collapse. That makes Schaeuble’s confidence sound all too similar to former U.S. Treasury Secretary Henry M. Paulson’s optimism that the U.S. financial system could withstand the 2008 loss of Lehman Brothers, only to witness the deepest global recession since World War II and a 40% slide in the Standard & Poor’s 500 Index in six months.
“If there’s no contagion who cares about Greece, but I wouldn’t be so sure and if I were Germany I’d not be willing to risk it either,” Jim O’Neill, chairman of Goldman Sachs Asset Management, said in a May 9 interview. “If a Greek exit had unforeseen consequences for contagion across countries it would have been a huge mistake.”
Friday Credit rating agency Fitch put the whole of the eurozone on notice that were Greece to leave the currency bloc as a result of its current crisis, the remaining countries could find their sovereign ratings at risk.
It said it was likely to put all euro area ratings on negative watch if Greece were to leave and that those countries which currently have a negative outlook on their ratings would be at most immediate risk of a downgrade.
It said those countries were France, Italy, Spain, Cyprus Ireland, Portugal, Slovenia and Belgium.
Containing those threats would be vital because the cost of a broader break-up would be “very large” given the region’s financial, trade and strategic links, said Willem Buiter, the London-based chief economist at Citigroup, who last week raised his estimate on the chances of a Greek departure to 75% by the end of 2013 from 50%.
Buiter and colleague Ebrahim Rahbari wrote in a report published yesterday that the ECB would use its “potentially infinite” resources to restart its sovereign bond-buying program suspended in April and enact another round of long-term lending akin to the 1.02 trillion euros of three-year low-cost loans issued to banks around the turn of year.