Estimates have been made as to the cost of a Greece exit
Writes Ambrose Pritchard at the Telegraph, (Hat tip Bob Wenzel)
Eric Dor's team at the IESEG School of Management in Lille has put together a table on the direct costs to Germany and France if Greece is pushed out of the euro.
These assume that relations between Europe and Greece break down in acrimony, with a full-fledged "stuff-you" default on euro liabilities. It assumes a drachma devaluation of 50pc.
Potential losses for the states, including central banks
They conclude:
The total losses could reach €66.4bn for France and €89.8bn for Germany. These are upper bounds, but even in the case of a partial default, the losses would be huge.
Assuming that the new national currency would depreciate by 50 per cent against the euro, which is realistic, the losses for French banks would reach €19.8bn. They would reach €4.5bn for German banks.
Sounds about right.
I doubt that the US, China, and the world powers would sit back if the EU tried to "teach Greeks a lesson" by making life Hell for them.
There would be massive global pressure on Europe to handle the exit in a grown-up fashion, with backstops in place to stabilize Greece. The IMF would step in.
And here is the part to worry about.
More from Mr. Pritchard,
Needless to say, the real danger is contagion to Portugal, Ireland, Spain, Italy, Belgium, France, and the deadly linkages between €15 trillion in public and private debt in these countries and the €27 trillion European banking nexus.
The ECB will likely resort to printing of money in the scale like never before and will likely be backed by the US Federal Reserve.
If hell breaks lose and the Euro comes undone the more money printing will be unleashed by independent central banks to protect their banking system.
As a side note, this is about the preservation politically protected banking system which has functioned as an integral part of the current structure of political institutions—the welfare-warfare governments and central banks.
So we should expect markets to be highly volatile in either directions as events unfold.
Just a reminder, I bring this up NOT to scare the wits out of market participants (funny how from being a perceived Panglossian analyst, I am precipitately seen as the present day Jeremiah). Some people reduce stock market logic into a groupthink fallacy ("either you are with us or against us").
Paradoxically, the article I quoted above comes from the mainstream.
I am simply presenting the risks that faces the marketplace given the current conditions.
As an old saw goes, pray for the best, prepare for the worst.
As to whether Greece will exit the Eurozone or is beyond my knowledge. The Greek government emerging from the June elections will decide on that. I can only guess or toss a coin. But I can either act to ignore this or include this in my calculation for my positioning.
The fact is that in case the new Greek government decides to opt out of the EU, this would have a material impact on the marketplace—all over the world, the Phisix not withstanding.
Since the overall impact to the markets will likely be unknown, except for some numerical estimates to rely on (which may or may not be reliable) and where the psychological impact cannot be quantified or even qualified, such environment is called as uncertainty.
The current conditions suggests of greater than usual uncertainty. Add to that the China factor and the Fed’s monetary policies.
So, for me, it pays to keep a balanced understanding of how the local markets may become vulnerable to a contagion transmission from external events, than from blindly embracing or getting married to a single position.
I always try to keep in mind the legendary trader Jessie Livermore’s precious advice: There is only one side of the market and it is not the bull side or the bear side, but the right side
Since the markets are about managing opportunities, then opportunities will arise for profits, and opportunities will also arise for wealth preservation.
For now I see the right side of the trade as balancing my portfolio tilted towards the preservation of resources.
On the other hand, I must add that bloated egos will eventually be humbled by the marketplace.
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