For two years Washington and Wall Street have been bracing for Greece’s eurozone exit, but despite the preparations, fears remain that an “X factor” could slap around the world’s largest economy.
The most popular hypothesis runs: On June 17 Greek voters will again back parties that want to renegotiate the EU-IMF bailout to have more latitude on painful spending cuts.
European creditors — particularly Germany — will refuse and so the flow of funds will stop, perhaps as soon as July or August.
Greece will then run out of cash, forcing it to welch on its debts. Left with no cash for government wages, Greece will have to start doling out pay in other form — effectively introducing another currency.
Willem Buiter, a noted euroskeptic and chief economist for Citi, predicts there is a “50-75 percent” chance Greece leaves the eurozone, possibly in early 2013.
For the money men on Wall Street and politicos in Washington, preparations for that possibility have long been underway.
According to Bank for International Settlements data, US banks’ direct exposure to Greece now stands at just $4 billion.
That may be just as well.
Japanese investment bank Nomura has been simulating a Greek exit for six months.
One of its currency analysts, Jens Nordvig, predicted Greek exit spillovers for the United States via currency markets, a slump in Greek import demand, credit losses and regional politics.
Most of these are manageable thanks to two years of preparations, said Grossman. But two extremely large, interlinked question marks remain: indirect contagion and market panic.
Here the specter of the collapses of AIG and Lehman Brothers looms large.
While each had significant problems in the run-up to 2008, it was ultimately market rumor that spurred their terrifyingly quick demise.
With European banks still exposed to Greece to the tune of $65 billion, and indigenous problems in Spain, Italy, Portugal and Ireland, panic could easily cause banks to doubt their counterparties and freeze lending.
The disastrous results could quickly spread through the international financial system.
Here the US authorities have also been doing their homework.
The Treasury Department avoids talking about preparations for Greece leaving the eurozone — seeming to bet that chatter about a “Grexit” has as much to do with politics as finance — but preparations are almost certainly in the works.
If a US bank looks in trouble, he said, the government will step in, using powers gained since the last financial crisis.