By contrast, bond prices were falling in Europe, pushing interestrates up on perception of rising risk of default. Borrowing costsrose for governments in Spain and Italy , nations that pose a high risk of default if the eurozone fails towork out a survival plan. Stock prices in Europe fell about 2 percent Wednesday, and America 's Dow Jones Industrial Average was down about 1 percent, near 12400, at mid-day. Some economists say it's not too late to save the currency union,even if Greece ends up exiting in a messy default later this year.But talk of a possible eurozone "divorce" has beengrowing louder in recent weeks. |
"We think that the ramifications of a Greek exit are moreserious than the market anticipates," said an analysisreleased Wednesday by the investment firm Morgan Stanley . "While a eurozone break-up is not our base case scenario, weraise our subjective probability to 35% from 25%," the firmsaid. And the firm said this outcome could transpire over the nextyear or so, rather than the longer time frame it had forecastpreviously. A partial or total breakup of the eurozone would impose hardshipson Europe and the global economy affecting everything fromEuropean demand for imported goods to the financial health ofprivate-sector banks.
Even if Greece were to become just a one-offdeparture, that event would heighten uncertainty about othernations and impose steep costs on both the Greek economy and oncreditor institutions in the rest of Europe. If other nations exited, or the euro currency fell apart entirely, the economic fallout would be even greater. The economists at Morgan Stanley say they expect the eurozone tofind a path forward. "We believe there are still significantincentives for both debtor and creditors to negotiate an outcomethat results in Greece remaining in the single currency," saysthe new report, by Elga Bartsch. To save the currency union, however, member nations including areluctant Germany may need to take some big and costly steps.
Those might includegreater guarantees for bank depositors (to prevent bank runs),restructuring and injecting fresh capital into weak private-sectorbanks, and a version of "fiscal union" in which membernations collectively stand behind new debt called eurobonds. All this could help prop up the struggling European economy whilemember nations impose needed fiscal discipline and other reforms. Some forecasters are more pessimistic than Morgan Stanley. In ablog post this week, economists Peter Boone and Simon Johnson arguethat an outright breakup appears unavoidable. "For the last three years Europe s politicians have promisedto 'do whatever it takes' to save the euro.
It is now clear thatthis promise is beyond their capacity to keep," they write."It requires steps that are unacceptable to their electorates.No one knows for sure how long they can delay the complete collapseof the euro, perhaps months or even several more years, but we aremoving steadily to an ugly end." They argue that a default by Greece, driven by dire economicconditions there, will reveal the large sums at stake as Europeanleaders lean on taxpayers and the central bank to support nationslike Spain and Italy. "The euro system will appear far more fragile and dangerous totaxpayers and investors," write Mr. Boone of the London School of Economics and Mr. Johnson of the Massachusetts Institute of Technology.
Could Europe find some muddle-through scenario, in which theeurozone survives? That's what many investors are still expecting,but Wednesday's move revealed a rise in concern.
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