The U.S. faces possible shockwaves if Greece leaves the euro, at least according to AP writer Matthew Craft.
As usual, a lot of the copy is simply idle speculation to up the word count. The mention of CDS, credit default swaps, is interesting. Private holders of Greek bonds have already taken haircuts -- reductions in the face-value of Greek bonds, whereas banks and central banks holding such bonds did not. In essence, Greek already defaulted on a portion of its debt -- which could have triggered the cascade of CDS claims, except they did not call the action a default.
To summarize, Greece is going to leave the euro and start printing drachmas which will immediately devalue. The ECB is going to come in, along with the IMF, probably with some Federal Reserve backing, and stick its finger in the dike. Everybody will be saying how the crisis was averted and it was really no big deal, for about a week. But all the governments that pitched in money will now be deeper in debt. The "eurobond" solution is really a "krautbond" solution, and, as Merkel points out, the Germans are getting restless carrying the rest of Continent on their backs. I don't blame them. The Germans should shrug off their collective guilt for WWII and go Galt on the slackers.
When Greece does bail out, there will be no avoiding the CDS language. There will be no hiding the exposure of some banks and nations, though creative accounting can work wonders. The immediate effect of a loss like this is recessionary and deflationary for everybody except Greece where there will be a total economic collapse with skyrocketing inflation similar to Argentina in 2001. Both the Fed and the ECB will crank up the printing presses to fill the void, but I think it will avail them little this time.
When Greece goes, there are still some jokers in the deck. Spain, Italy, Portugal, and Ireland remain significant drains on the EU economy. Ireland is already a little miffed that they got stuck with a worse deal than Spain appears to be getting. If, as is speculated, the bond rates on Spain and Italy rise dramatically -- and they are already too high for comfort -- then those countries could have no choice except to follow Greece in exiting. At that point, I think Germany goes along with the eurobonds, even though it probably means that Merkel and her party are voted out of power.
You know your good-for-nothing brother-in-law who can't hold a job? He's the one who somehow manages to always have money for Mad-Dog and Marlboros but who is always hitting you up for a loan to cover groceries for the kids for "until payday". Now he comes along and says he needs a car for his "new job". Of course, the bank won't loan him the money because his credit score is in double-digits. But you have a score of 890, and the bank would love to lend you money, so the BIL gets you to co-sign his car note. You know how this is going to end, but he is married to your sister, so you sign. In three months, you find that he's gotten himself fired and is spending the day watching the game show channel while you had to pick up some part-time work because you are paying for his (trashed) car as well as your own debts, just as you expected.
That is more or less what eurobonds mean to the Germans, and the solution will be just about as enduring as your BIL's new gig.
Another way to look at it is to imagine a poker game where some of the players are allowed to hand off cards to other players while the rest of us are stuck playing what we have been dealt. This has gone on for way too long, and the honest, hard-working people have already lost way too much. Some are finally starting to think they might as well pull out of a rigged game. As the Gambler says, "You got to know when to fold 'em."
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