Friday, May 25, 2012

Germany Too Sanguine About a Greek Exit

      Mind you this is likely more trying to put on a brave public face to make the Greeks think that they need the euro much more than the euro needs them-in other words another negotiating ploy. They're trying to psyche out Greece.

      However, based on what we've seen from the market already the market isn't buying this and if  Germany and the EU are really as unconcerned about Germany leaving as they claim they are likely greatly underpricing the risk. Contagion is very real in as Spain and Italy bonds have already been under attack and Greeks are already pulling out their deposits. If a country like Italy-which has the third largest economy in the euro goes down the euro will have a very heard time.

     Now according to analysis by a head at Societe Generale, the contagion could indeed touch France and yes "even" Germany itself:

     "Euro zone stocks could plummet up to 50 percent if Greece makes a disorderly exit from the euro zone, a research note from Societe Generale said on Friday."

      "In the note, Societe Generale Head of Equity Strategy Claudia Panseri said the DJ Euro Stoxx 50 [.STOXX50E  2161.87    5.35  (+0.25%)   ], an index of leading euro zone shares, could halve if a disorderly Greek exit caused two years of declining profits in the euro zone, plus rising bond yields [cnbc explains] and equity risk premium."

      "Panseri said a Greek exit would put France and Germany at risk of contagion as well as peripheral European nations [cnbc explains] ."

      “While central bank [cnbc explains] stabilizing measures are likely to be taken in the event of contagion, with the high correlation among euro zone indices, we believe there would be an increased risk of spillover after a Greek exit from the euro zone,” she said.

     "According to Panseri, euro zone corporate profits could fall by 20-to-30 percent on a Greece exit, due to lower consumption and fiscal tightening in the remaining member countries. Bond yields could widen 100-to-200 basis points."

     It seems to me that Germany is playing the same game the GOP plays here in the US during the debt ceiling debate-it's a high stakes game of euro chicken. Now will they blink if Greece calls their bluff. If they do they understand the stakes. If they don't then they don't understand the stakes. They don't get just how large contagion really is. So in a way we're at the mercy of what the Germans really know.

   Either they understand all this very well and are merely trying to bluff Greece. Or they don't understand this and really believe their own rhetoric that Greece leaving is really no big deal. If their understanding is the latter we're in for some mighty rough storms. The only question then is how much we here in the US, Canada, Japan and China can "bifurcate" from all this.


  1. Pulling their deposits from the banks is a great idea, because if Greece separates from Euro Zone, bankruptcies will really rise.

    By: exchange rates

  2. Guess it's a catch 22 because removing deposits in iteself causes bankruptcies. I don't know that it's a great idea so much as just desparation.

    Certainly living in a society with a banking system that's destryoed is not great but miserable.