Eurozone Crisis Has Investors Heading for the Grexit
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The Fiscal Times
May 14, 2012

If you were writing the story about the financial crisis and the euro crisis as a work of fiction, your editor would say you've jumped shark.  Who would believe that after signing a $43 billion bailout deal two years ago with the European Union and IMF, Greece would be close to bailing out of the eurozone?

Who would believe that the heroine of eurozone GDP, Angela Merkel, would witness her party's bitter defeat in one of Germany's most populous states?  And who would believe that Jamie Dimon, the above-it-all CEO of J.P. Morgan would follow the path of MF Global and lose $2 billion (and possibly $3B) on a "stupid" derivatives trade? 

And then there's M. Hollande -- mon dieu!  A socialist running France again?  Merkel must now cope with the end of austerity.

Economists believe this and more.  According to The New York Times' Paul Krugman, the end game for the euro is near:  

1. Greek euro exit, very possibly next month.
2. Huge withdrawals from Spanish and Italian banks, as depositors try to move their money to Germany.
3a. Maybe, just possibly, de facto controls, with banks forbidden to transfer deposits out of country and limits on cash withdrawals.
3b. Alternatively, or maybe in tandem, huge draws on ECB credit to keep the banks from collapsing.
4a. Germany has a choice. Accept huge indirect public claims on Italy and Spain, plus a drastic revision of strategy — basically, to give Spain in particular any hope you need both guarantees on its debt to hold borrowing costs down and a higher eurozone inflation target to make relative price adjustment possible; or:
4b. End of the euro.

Meanwhile,  mounting fears that China is facing an economic slowdown are taking a toll on stocks, in particular commodities like oil and natural gas.  Still, China has not "matured" as an economy, and the country has plenty of room to grow.  Maybe that's why 83 percent of Chinese consumers believe their kids will live a better life while only 21 percent of consumers in the U.S. are as optimistic, according to the Boston Consulting Group.

The BCG study paints a gloomy picture of developed countries.“If you take the world from the perspective of the middle-class citizen in the U.S. and Western Europe, we are still lurching from crisis to crisis," said Michael J. Silverstein, a BCG senior partner. "Americans, in particular, are anxious about their future, their jobs, and their lack of savings."

Nevertheless, it takes a lot more than a Grexit to undermine the American economy. Consumer sentiment is at a 4 year high, according to new data from the Thomson Reuters/University of Michigan index.  Gas prices are dropping as global demand slows, and inflation is still in check (except for health care and college costs). 

 

Editor in Chief Jackie Leo, former EIC of Reader’s Digest, Consumer Reports, and Editorial Director of ABC News’ Good Morning America, is an award-winning journalist and author. The Fiscal Times is her 4th start-up venture.