We are living in a world where sooner or later Greece is going to default. The US markets are unstable due to political headwinds in the US, but even more importantly the worries about what will happen when Greece finally goes down. Markets naturally price in the worse case scenario and let things settle out once the actual event happens. The worse case scenario begins with Portugal, Spain, and Ireland going down as well. The final nail is France and/or Italy and one or more of the European banks going down as well. Italy and France have large economies and their troubles begin and end with the government debt being held by large banks there. The contagion comes to the US when one of more of the US money center banks who have holdings in those European banks either as deposits or European government debt gets hit as well. We are talking upwards of $100 billion dollars or more hits on US banks, who are already wobbly in capital. There is also the fact exports that come from the US to Europe will get hit when Europe has trouble.
Frankly no one knows what will happen when Greece ultimately defaults. The sad thing is that the Greek people do not understand they have been living so long above their productive lives that the austerity that is coming will likely bring the Greek government down and maybe out all revolution. Political leaders in Europe know this and worry about their own situations. Germany the only economic stable country in Europe has propped up Greece until now, but the costs are now becoming prohibitive and Chancellor Merkel knows she is running out of favor with the German people on bailing out Greece. I would expect one more band aid moment here, but can not see where Greece lasts out 2012.
Obama sees what is happening in Europe and knows if Greece defaults the contagion is sure is plunge the US back into recession and with it his already fading reelection chances. Obama has been urging Merkel to keep Greece afloat at least until his own election is over, but Merkel has her own reelection problems. Merkel is slowing beginning to tell Greece they are on their own. If this was not so serious the game of politics here would be good clean fun.
This deadly serious game is ultimately coming to an end and markets react daily by being on a roller coaster. My best guess is that it will hurt US interests significantly, but not as bad as some believe. Again markets assume the worst. The European bank does not have the ability to print money like the Federal Reserve, so the US has leverage when needed here. There is also the fact that the Federal Reserve has offered to lend money to European banks to prop them up. If that actually occurs Bernanke will be taking the Federal Reserve into uncharted political waters and frankly I fear the repercussions when he sits for renomination. Of course Obama wants Bernanke to bail out Europe to help his prospects.
All of this mess could come crashing down one day or ugly market morning with dramatic drops in markets and prices which could approach the 2008 debacle. On the other hand it could go drip, drip, drip like water torture slow too. Europe and Greece are playing a game of make believe everything is all right, but make believe has to end and what happens then is a guessing game. Frankly the worries here keep me from sleeping well some nights
No comments:
Post a Comment