Tuesday, May 29, 2012

Eurozone Crack-up Will be Worse than Lehman

Athens is burning and the whole world fiddles. In fact, the crisis seems to have confirmed rumors of the decline of the west.  The Euro hit a 2 year low today, reflecting real economic dislocation afoot in the Eurozone. S&P downgraded five Spanish banks last week. And, late today, the ECB turned down a request from Madrid to assist in bailing out its financial sector. The Eurozone crisis may well be the worst managed financial crisis in history. After all, Europe has the resources to grow out of this crisis.

In any event, a split has emerged: some commentators think a Grexit will lead to financial chaos; but, some think it can be managed.

The problem is that a Greek exit from the Eurozone would disrupt trade, impede investment, and cause massive cash hoarding as depositors, businesses and financial institutions all would try to move rapidly out of Greek denominated assets and into safe havens like Germany, Great Britain and the US.  Soon Spain and Italy would be suspect and they would follow Greece down the tubes into debt-deflation. The volume and speed of risk aversion and capital flows would make Lehman Brothers look like a walk in the park.

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