Why Greece's spillover across euro area will probably be contained this time

[CityFarmer]

Contagion risk of euro-out is well-contained? May be, but I always assume Mr. Market is unpredictable...

Why Greece's spillover across euro area will probably be contained this time

BRUSSELS (Dec 30): Greece's flirtation with an exit from the euro in 2011 and two cliffhanger elections in 2012 prompted the darkest days of the debt crisis, halted only by the European Central Bank's pledge to save the currency come what may.

Now, with the collapse of another Greek government, Europe’s leaders, its more vulnerable economies and financial markets are better prepared.

While euro in-or-out threats will echo through the Greek election campaign, the spillover across Europe this time is likely to be contained.

“We’re looking at a Greece problem -- the euro crisis is over,” Holger Schmieding, chief economist at Berenberg Bank in London, said by phone.

“The euro crisis was all about contagion risk. I do not expect markets to seriously contest the contagion defenses of Europe.”

Investor reaction to the Greek parliament’s failure to pick a president traced the familiar north-south divide.

Greek stocks and bonds plunged and markets were buffeted in Italy, Portugal and Spain, while funds flowed into Germany, Europe’s biggest economy and hard-money bastion.

Yet look closer and Italy, the euro zone’s second most-indebted country after Greece, is nowhere near a fiscal calamity.

Ten-year borrowing costs are hovering around two percent, compared to over seven percent at the height of the crisis.

Bond holders are charging Italy 144 basis points more than Germany to borrow, a far cry from 553 basis points in November 2011.
...
http://www.theedgemarkets.com/sg/article...ained-time

[opmi]

Scary movies are not scary after you seen it the second time.

[CityFarmer]

Scary movies are not scary after you seen it the second time.

It is true for movie, but a real car accident is equally scaring, even at the Nth time.

[greengiraffe]

http://www.cnbc.com/id/102307459

THE EUROPEAN UNION
Germany: Euro zone can handle it if Greece leaves: Report
1 Hour Ago
Reuters

A visitor walks beneath a display at the Athens Stock Exchange, Oct. 15, 2014.
Angelos Tzortzinis | AFP | Getty Images
A visitor walks beneath a display at the Athens Stock Exchange, Oct. 15, 2014.
The German government believes that the euro zone would now be able to cope with a Greece exit if that proved to be necessary, Der Spiegel news magazine reported on Saturday, citing unnamed government sources.

Both Chancellor Angela Merkel and Finance Minister Wolfgang Schaeuble believe the euro zone has implemented enough reforms since the height of the regional crisis in 2012 to make a potential Greece exit manageable, Der Spiegel reported.

"The danger of contagion is limited because Portugal and Ireland are considered rehabilitated," the weekly news magazine quoted one government source saying.

Read More Why Greece is not the risk it once was


In addition, the European Stability Mechanism (ESM), the euro zone's bailout fund, is an "effective" rescue mechanism and was now available, another source added. Major banks would be protected by the banking union.

The German government in Berlin could not be reached for comment.

It is still unclear how a euro zone member country could leave the euro and still remain in the European Union, but Der Spiegel quoted a "high-ranking currency expert" as saying that "resourceful lawyers" would be able to clarify.

Read MoreGreece unlikely to leave EU, but not impossible: Pro

According to the report, the German government considers a Greece exit almost unavoidable if the leftwing Syriza opposition party led by Alexis Tsipras wins an election set for Jan. 25.

The Greek election was called after lawmakers failed to elect a president last month. It pits Prime Minister Antonis Samaras' conservative New Democracy party, which imposed unpopular budget cuts under Greece's bailout deal, against Tsipras' Syriza, who want to cancel austerity measures and a chunk of Greek debt.

Opinion polls show Syriza is holding a lead over New Democracy, although its margin has narrowed to about three percentage points in the run-up to the vote.

German Finance Minister Schaeuble has already warned Greece against straying from a path of economic reform, saying any new government would be held to the pledges made by the current Samaras government.

[greengiraffe]

Merkel’s U-turn on Greece reveals Germany’s real motivation
OLIVER MARC HARTWICH THE AUSTRALIAN JANUARY 09, 2015 12:00AM

I WROTE last month that European leaders usually pick the least appealing policy option and still manage to make it worse. Maybe that was a premature assessment. It now looks as if they are about to take a good option and turn it into a disaster.

It has been clear for long time that Greece would be better off outside the eurozone. In fact, the country should never have been admitted in the first place. So, indications that the German government is (finally) prepared to let Greece depart from the monetary union are certainly a step in the right direction.

The way the Germans are going about their policy U-turn on Greece’s euro membership is nevertheless shameful. Not only does it unmask any previous pretence of European solidarity, it also risks destabilising Greece in the run-up to its elections on January 25.

On Monday, German newsmagazine Der Spiegel reported that Angela Merkel’s government believes a Greek exit from the eurozone would now be manageable without posing greater risks to other countries.

Of course, the Germans dutifully delivered their official denials, stating that their official position had not changed and Greece should keep the euro — and its obligations to pursue austerity.

Der Spiegel’s well-informed story appears far more plausible than any denial. German patience with Greece is running out anyway but the prospect of having to deal with an openly hostile Greek government led by the Syriza party would be the final straw. Not even Merkel would manage to explain to the German public why her country should continue to support Greece without any concessions in return.

There is, however, another side to the story about Merkel’s change of mind on Greece. The possibility of an anti-austerity government in Athens offers the perfect excuse to walk away from previous commitments to keep Greece in the eurozone.

Since the beginning of the Greek drama, Merkel and her government routinely elevated Greece’s euro membership to a question of war and peace, a symbol of pan-European solidarity and talked about the irreversibility of the “grand European project”. Such rhetoric should have never been taken at face value, but now we can see why Germany opted to keep Greece in the eurozone. It had little to do with lofty idealism.

There were two very practical considerations that influenced Merkel’s decision not to let Greece depart immediately. The first was fear of contagion. Greece, as small as it is, was believed to be important enough to infect other European economies if it exited from the euro. With the firewall of the European Stability Mechanism in place, the Germans are optimistic that any future Greek problem can be contained.

The second was fear that German financial institutions might be hit hard. Indeed, at the beginning of the euro crisis, quite a few German banks were involved in Greece. Over the past five years, these financial institutions have withdrawn from Athens almost completely.

What has changed, therefore, is not so much the political direction that Greece may take after its elections. Germany no longer fears a Greek exit.

This nicely demonstrates what all this eurozone activism over the past five years was really about. It had very little to do with “helping Greece” and a lot with protecting one’s own interests. Had it been about helping the Greeks, it would not have taken so long to show them a viable path towards exiting a monetary union that clearly does not work for them.

German power politics kept Greece in the eurozone and may now kick Greece out of the eurozone. It is as simple as that.

However, Merkel’s U-turn on Greece should be welcomed because, as I have always said, Greece’s chances of recovery would be much better if it had its own currency. But the return to the drachma should have been better prepared.

By threatening to kick Athens out of the eurozone depending on the election result, the Germans have put Greece in limbo. Little wonder Greek stocks crashed in recent days. A cloud of uncertainty now hangs over the country. It should not surprise anyone if, as the election gets closer and Syriza is still in the lead, a bank run starts. Why would anyone keep their euros in Greek bank accounts when monetary reform and devaluation appear to be around the corner?

If Greece was to leave the eurozone, such a step should have been taken swiftly and ideally without much public warning.

What is happening now is the very opposite. Weeks before the Greek election, the German government, as the pivotal player in the eurozone, has signalled that “Grexit” may be unavoidable. This is not the way in which to prepare for it.

Once again, we are treated to European-style crisis management. Or rather: crisis amplification. Instead of dealing with the Greek crisis, the actions of European leaders, in this case the German government, are making a bad situation worse.

Over the coming weeks, we will see more political and economic uncertainty in Greece. Not all of it the fault of the Greeks.

Should the poll result in a Syriza-led government, we will find out whether the Germans can actually succeed in kicking Greece out of the euro and also whether their optimism about being able to contain the crisis in Greece was justified.

Oliver Marc Hartwich is the executive director of The New Zealand Initiative.

[specuvestor]

IIRC Germany already mentioned Greece could exit Eurozone if Syriza wins as they had said they will not honor the austerity agreement... More than TWO years ago

I dont see a U-turn.

[greengiraffe]

A Greek exit from the eurozone could happen by accident
SIMON NIXON THE AUSTRALIAN JANUARY 13, 2015 12:00AM

SINCE its inception, the eurozone’s survival has rested on a paradox. On the one hand, the stability of the single currency hinges on the market’s faith in its irreversibility.

It was to restore this faith that European Central Bank president Mario Draghi promised in 2012 to do “whatever it takes” to keep the bloc together. On the other hand, the stability of the eurozone also requires that the possibility of euro exit is real, if only as a way of enforcing discipline among member states.

The political crisis in Greece is testing this paradox to the limit. No one wants Greece to leave the euro, least of all the Greeks themselves, 74 per cent of whom want the country to remain in the single currency.

Even the Leftist Syriza, which polls suggest will win the January 25 election and which flirted with a policy of euro withdrawal in 2012, now recognises that Grexit would be catastrophic.

Quitting the euro and repudiating existing debts will not magically revive the economy. The government would likely be forced to tighten rather than loosen fiscal policy as the current small primary budget surplus rapidly turned into deficit as confidence and credit dried up, plunging the country back into recession.

Nor is devaluation likely to bring much respite. Whereas Spain, Portugal, Ireland and Italy have increased exports as they have regained competitiveness, Greek exports have so far received little boost from the country’s substantial internal devaluation. This suggests that structural obstacles rather than prices are what is holding back export growth.

Worse, devaluation and possibly hyperinflation if the government was unable to borrow to fund its activities or recapitalise the banking system and was forced to rely on the Bank of Greece to print money.

Financial instability would deter the foreign investment that is Greece’s best hope of exiting the crisis but wipe out what remains of citizens’ savings.

These might be short-term risks worth taking if there were any realistic prospect that a post-exit Greek government might deliver the reforms needed to turn Greece into a functioning modern economy supported by an efficient, effective public administration and judicial system. That seems unlikely: Grexit would be a victory for all those vested interests that have successfully resisted reform.

Just because Grexit would be disastrous does not mean it can’t happen. The risk of an accidental Grexit is real. Greece’s bailout program with the European Commission, the ECB and International Monetary Fund — the Troika — expires at the end of next month after Prime Minister Antonis Samaras secured a two-month extension. Whoever wins the election will need rapidly to secure a further extension to buy time to negotiate the long-term deal with the Troika that eluded Samaras. A further extension is essential partly because Greece must repay €1.5 billion ($2.6bn) to the IMF in March and faces further debt redemptions over the coming months.

Without a deal with the Troika either to release earmarked bailout funds or to boost its borrowing, Greece might soon find itself forced to default on its debt. Worse, the ECB requires Greece to be in compliance with an agreed bailout program as a condition of its substantial support of the country’s banking system. If the ECB refused to continue to fund the banks, the government would have to issue its own currency to prevent the economy imploding and Greece would be out of the euro.

Nor is this an idle threat: Greek banks suffered €3bn of deposit outflows at the end of last year and this trickle could turn into a flood during a prolonged period of uncertainty. The ECB showed in the case of Cyprus it won’t be deterred by a new government to do what it thinks is necessary to protect its balance sheet.

The risk is that Syriza leader Alexis Tsipras may find the scale of the U-turn necessary to strike a deal with the Troika too much to swallow. As a minimum, the Troika will surely insist that he does not reverse the reforms to the public administration, tax codes, product and labour markets, all of which Syriza opposed. The Troika may also insist Tsipras commit to the same future reforms that it demanded of Samaras, particularly if he is to have any chance of securing debt relief. Even in the disreputable world of Greek politics, where election commitments can mean so little, Tsirpras’s credibility could hardly survive such a humiliating climb down.

Eurozone policymakers appear surprisingly relaxed about the risk of failure. Some argue that the eurozone now has plenty of experience at handling such brinkmanship and expect Tsipras swiftly to buckle when confronted by reality.

Some are also willing to bet that even if he doesn’t yield, the eurozone could withstand the shock of Grexit. Greece is better ring-fenced today than in 2012 and the eurozone has more credible weapons to fight contagion. Investors seem to share this optimistic assessment, judging by the lack of market contagion to the rest of the eurozone. But if Tsipras wins the election, both he and eurozone policymakers will have to tread very carefully to avoid an outcome that no one wants and is in no one’s interest.

And the consequences of an accidental Grexit may be far-reaching. After all, it would destroy the necessary illusion of the eurozone’s irreversibility, a shock from which it may struggle to recover.

[CityFarmer]

It shouldn't be a shock to market players, since sufficient propaganda was carried out before...

Euro, stocks fall as anti-austerity party wins Greek election

TOKYO - The euro skidded to near an 11-year low and U.S. stock futures fell on Monday as Greece's Syriza party promised to roll back austerity measures after sweeping to victory in a snap election, putting Athens on a collision course with international lenders.

The euro fell to as low as $1.1135 on the vote outcome, not far off an 11-year low of $1.1115 touched on Friday when the common currency took a battering after the European Central Bank unveiled a bond-buying stimulus program last week.

U.S. stock futures fell 0.6 percent while the Nikkei futures also dropped about 0.5 percent from the local close on Friday on heightened concerns the Greek election results could lead to renewed instability in Europe.

Syriza leader Alexis Tsipras was set to become prime minister of the first euro zone government openly opposed to bailout conditions imposed by European Union and International Monetary Fund during the economic crisis.
...
http://www.todayonline.com/business/euro...k-election

[BlueKelah]

ECB has let the dogs out, another plate of asset bubbles coming right up!! Maybe if USA raises rates, all the funds will flock back to the states and leave Europe poorer than ever before...

-- via Xperia Z1 with tapatalk

[greengiraffe]

http://www.cnbc.com/id/102368006

Why markets shouldn’t be afraid of Syriza
Catherine Boyle | @cboylecnbc


Greece has a new government, led by left-wing, anti-austerity Syriza – an event that has heightened fears about the country's economic future and relationship with the other 18 countries that use the euro.

Syriza, led by Alexis Tsipras, have agreed to go into coalition with the Independent Greeks – a right-wing, anti-bailout party led by a former New Democracy minister, which thinks that Germany should pay Greece reparations for occupying it during the Second World War.

They are unlikely bedfellows, united by a common enemy: austerity and the international creditors who have enforced it.

Greek bond yields have risen, and its equity markets fallen, on Monday, as investors digest the news. There are concerns that we're weeks away from a repeat of 2012's euro zone debt crisis, where fears of a default by Greece on its debts would permanently fracture the euro zone.

But here, we take look at why it may not be time to panic – yet.

Read MoreGreek exit? Not so fast, experts say
Grexit…or not

Alexis Tsipras, leader of the radical leftist party Syriza, delivers a speech during a congress of the party in Athens, on January 3, 2015. Syriza.
Angelos Tzortzinis | AFP | Getty Images
Alexis Tsipras, leader of the radical leftist party Syriza, delivers a speech during a congress of the party in Athens, on January 3, 2015. Syriza.
The possibility Greece would end up crashing out of the single currency sent markets into a tailspin three years ago. However, 75 percent of Greek voters still say they want to remain in the euro, something which Tsipras will have to heed in his negotiations.
Even so, the euro zone is in a better shape than it was in 2012: Other "peripheral" countries -- Portugal, Ireland and Spain -- are in better economic shape than they were last time around.

There are also more extensive backstops in place to help out banks with large exposures to Greece, such as France's Credit Agricole or Germany's KfW. And of course the ECB is committed to keep the liquidity flowing, after its announcement of a new quantitative easing last week.

Read MoreVote puts Grexit back on front burner

Everything is negotiable


Tsipras may have sounded like a firebrand en route to office, but he would not be the first politician to be more pragmatic once in office.
With the next tranche of debt repayment due to Greece's creditors on March 1, he will barely have time to appoint his cabinet before getting to the table with the troika of the International Monetary Fund, European Commission, and the European Central Bank, which represents around 80 percent of Greece's debt.

Progress in these troika negotiations could include Greece being allowed longer to pay off its debt, and at lower interest rates, coupled with more relaxed fiscal targets, possibly in return for some movement on structural reform.

Actual writedowns in the value of its debt, which currently represents around 175 percent of its gross domestic product, would be more controversial internationally.

Corruption crackdown

You don't have to spend too long in Greece to notice the level of corruption, which has been identified time and time again as one of the factors holding back the economy.

Syriza has expressed a wish to crack down on this burden, any progress here could represent a substantial step forward.


Catherine Boyle
Staff Writer and On-air Correspondent, CNBC