Greece is in really serious trouble. With elections just 18 days away the anti-austerity party and the pro-austerity party are neck and neck in the polls. Without austerity measures the Germans have said there will be no more bailout money. The German stance is logical – not much has really been done to make Greece more competitive. Despite all the money sent to them, their economy just continues to get worse, much worse. Bottome line – no tangible reform, no bailout. Wthout a bailout Greece has no choice but to leave the Eurozone and go back to being a lone country with its own currency,
In the meantime, Spainish bank troubles are escalating. The Spanish government insists it has the money to bail the banks out. Most doubt that, especially since Spain is asking the rest of the Eurozone for help. One solution offered by the European Commission was for the Eurozone to have a joint banking system. The Germans categorically shot that down immediately. In Europe the strong countries are getting relatively stronger and the weak are getting significantly weaker. Germany does not want to foot the bill for all of them.
If you had money in a Greek for Spanish bank and knew there was a possibility that your Euros on deposit would be turned into drachmas or pesos with far less value, what would you do? Of course, you would probably take it out and deposit it into a safer bank, say in another Eurozone country. That is very easily done in modern Europe. If and when that type of withdrawal becomes widespread holds the key to whether the troubled banks fail and ultimately whether Greece and Spain stay in the Eurozone.
If Greece were to exit that would mean losses for European banks and would set a precedent that a country can in fact leave the Eurozone, despite the treaty forbidding it. If Spain had to exit, Italy and Portugal would be next on the radar. Art Cashin of UBS said on CNBC this morning that the odds of a total Eurozone collapse are between 40% and 50%. I think that is probably a bit high but it is certainly much more likely than it has ever been.
Such a series of events would be really bad for stocks around the world and good only for US Treasury securities which are providing one of the few world safe havens, along with German banks and some other Northern European neighbors. This is by far the biggest issue in investing right now and bears a close watch.