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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

October 4, 2011 at 10:00 AM

The stark choice: Greek default or the end of the euro

From the New York Times: “Seeking to quash fears about an imminent default, Greece said Tuesday that it had enough money to pay its bills through mid-November — a month longer than previously indicated — even without the next installment of its bailout package.” Do you feel reassured by this?

The only ones who are: The playerz in the market that are betting against European sovereign debt, provoking what is in essence a slow-mo bank run. As Amanda Knox leaves Italy, that country has already caught the disease of contagion and lack of confidence from the Greek crisis. Last week its government bond sale required record interest rates. European leaders continue to dither. They haven’t even released the next installment in the $145 billion bailout agreed to last year, much less the $579 billion plan that’s moving slowly through ratification by member states. The markets don’t believe it. Many big banks there are insolvent or close to it.

What would it take? MIT economist Simon Johnson heard whispered estimates of between 1.5 trillion euros and 4 trillion euros. He writes:

This is a lot of money: Germany’s annual Gross Domestic Product (GDP) is only about 2.5 trillion euros, and the combined GDP of the entire eurozone is about 9.5 trillion euros. The idea is that providing a massive package of financial support would “awe” the markets “into submission” — meaning that people would stop selling their holdings of Italian or Spanish debt and thus stop pushing up interest rates. Ideally, investors would also give Greece and Portugal some time to find their way to back to growth.

That won’t happen. The answer is Greek default and even exit from the eurozone, perhaps followed by Portugal. And big haircuts for the bondholders. Without decisive action soon, the common currency itself will be at risk.

And don’t miss: James Howard Kunstler clarifies the demands of the Occupy Wall Street movement in his signature shy, pulled-punches style.

Today’s Econ Haiku:

“Trade war!” warns China

Slapped for its renmimbi games

So who started it?

Comments | More in Eurozone

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