It has started. The panic is full blown in Greece and the contagion will spread to Italy, Spain and Portugal. This is turning ugly and will infect the United States. Initially, for the United States, things will appear swell. Why? We will be the safehaven for those pulling their money out of Greece. Out dollar will surge in value. Which sounds like a good thing until you realize that our exports will become more expensive for other countries and, as a result, those sales will drop.
Here’s the latest news out of Greece:
The European Central Bank has stopped providing liquidity to some Greek banks as they have not been successfully recapitalized, the ECB said on Wednesday, confirming news earlier reported exclusively by Reuters.
The news sent the euro lower against the dollar, fanning concerns among investors and in Greece that the country may have to leave the euro zone.
The development highlights the weak state of the banking sector in Greece, where Greeks are pulling euros out of the banks in fear that their country may exit the European single currency despite the declared determination of EU powers Germany and France to keep Athens in the monetary union.
The Greek run on the banks is capturing attention here in Europe:
Political leaders in Athens were due to discuss an emergency government Wednesday to deal with a possible run on banks as it emerged Greeks withdrew almost $900 million in a single day, fearing their country could crash out of the euro currency by the end of the week. . . .
Greeks are withdrawing euros from banks, apparently afraid of the prospect of rapid devaluation if the country leaves the European single currency and returns to the drachma.
There are no good option nor are there magical solutions or silver bullets. This is a crash and burn outcome. It may be slow motion but it will infect all of Europe and ultimately the world. It means that Obama will have another excuse for a faltering economy. But this is terrible news, not just for the people of Greece but the world.
Lest you think this is just a European problem check out California:
California’s budget woes combined with poor economic results have long made it a poster child for poor fiscal management. The state’s credit rating has been downgraded to an A- by S&P, the lowest rating for any U.S. state, and its budget and pension shortfalls are infamous. Even more so than in other states, the main political challenge for California’s politicians will be to put the state on firm fiscal footing. Given the state’s poor current condition the rotten condition of its non-Hollywood, non-Silicon Valley economy, this process is bound to take years.
Governor Jerry Brown returned to the state house in 2011 with a plan to at least begin to tackle the state’s deficit. Like many other Democratic governors in similar straits, Brown has had to break some hoary blue taboos and made serious (though evidently not serious enough) cuts in spending and public sector employment.
The only difference is that California’s economy far surpasses that of Greece. Greece is showing us the path that California will be following within the year.