UBS’s Art Cashin offered his take on what contagion would look like in the eurozone if Greece is forced to abandon the euro in favour of its own currency.The decision to move back to the drachma would not follow some internal parliamentary debate, Cashin argues.
Instead, it would happen from some trigger event, that would force the country to self fund itself.
And that could cause a ripple effect in other euro states.
From today’s Cashin Comments:
How Contagion Might Happen – Various self-styled experts are holding forth on how and why the Greeks will leave the Eurozone. From blog sites to TV screens, they tend to portray it as a topic being resolved in a manner fit for the Oxford Debating Society.
From the perspective of watching financial markets for over a half a century (and a student of many centuries before) that’s not usually the way currency conversions occur. They tend to be forced by events.
A country could come to the bond market and find no takers. A collapsed bond sale of huge proportions could produce a crisis induced change.
Another such event could be an inability to meet a significant debt payment.
Yet another process could be a bank run. This is part of what’s going on in Greece. There has been a steady, but now accelerating, run on the banks with people shifting money out of the country.
If you are a Greek citizen who is lucky enough to have some money in the bank, you might want to take it out. If you take it now, you would be withdrawing Euros. That’s something you know the purchasing power of. If over the weekend, they switch to drachma, you likely would not have the same purchasing power.
So Greek citizens have been pulling out Euros and sending them to banks, or very trustworthy relatives, beyond the border. There, the value will not be affected by a shift to the drachma.
That’s the greatest danger of contagion. If Italians or Spaniards see Greece about to exit the EU, they will fear for their assets. Do they want to risk an overnight conversion to the Lira or the Peseta?
It is important to watch the bond yields of the European periphery. It may be more important to watch the bank flows. That’s what I’ll be watching.