It Ain’t Over Till the Fat lady Sings

If anyone tells you they know how the Eurozone crisis will play out, you tell them they’re lying. The horrifying slow-motion railroad wreck that has been unfolding since late 2010, described in these pages since September 2011, is far from over. And no-one knows how it will end. We all know about the €100 billion bailout of Spain’s banks in the first half of June. After initially denying that he would ever ask the EU for a bailout, Prime Minister Rajoy flip-flopped over the weekend of June 9/10 and the deal was done. Just as well, because it prevented the melt-down of the Spanish financial sector. The international financial markets had been terrified of the specter of the Spanish banking sector collapsing, bringing down the fourth largest Eurozone economy. But the markets were hardly mollified after the Spanish bank bailout. They still have plenty of other things to worry about. Spain’s cost of public debt is back around 7,28%, at a level similar to those of Greece and Portugal when they had to turn to the Troika (IMF, EU and ECB) for sovereign financial support. No-one knows how long Spain can hold out. In the meantime the Spanish economy is in the doldrums and unemployment is still rising, above 25%. One young adult in two is without work and the crisis is creating an entire lost generation in the Iberian Peninsula. Take Greece. (In fact, please take Greece. Please put it somewhere else, far from Europe.) After two bailouts from the Troika in exchange for an austerity program that has turned out to be poorly designed by the IMF and even less well implemented by the Greeks, they have woken up to the fact that they still have a decade of blood, sweat and tears ahead of them if they stay on this path. They frankly don’t know if they want to play at this game any longer. After an inconclusive vote on May 6 the Greek voters went to the polls a second time on June 17 in an implicit referendum on the Euro. Again the electors did not give a clear majority to either view on the Euro, but the pro-austerity parties won out against Syriza, a left-wing party that had promised, if elected, to renegotiate Greece’s existing bail-out agreement. The winning parties will now have to put together a workable coalition to govern and manage the austerity and bail-out programs, in a country that has not had a tradition of political coalitions in recent history. The uncertainty around the May and June elections has brought the Greek economy to a halt. Before the elections Greek depositors were withdrawing their money from Greek banks a rate which at its peak reached between €700 million and €900 million per day. Greeks understandably don’t want to be holding a bank account full of “New Drachma’ in Athens if they could be holding Euro-denominated deposits in a bank in Munich or Luxembourg instead. Major firms active in the Eurozone, not only those in Europe and the US but also those in the BRICs (middle income emerging economies), have set up contingency plans for a possible Greek withdrawal from the Euro. What would happen, for example, to a Euro-denominated contract with a Greek firm? What would happen to Euro-denominated assets in a Greek subsidiary? The contingency plan prepared by Credit Agricole for their Greek subsidiary leaked the week before the June 17 vote. It involves simply walking away from their investments in Greece if the country leaves the Euro. (This strategy is a corporate version of “jingle mail’, which is how American …