1. The Greek PM asking his grandmother's equivalent via the referendum on whether the highly technical proposal of the IMF-EU-ECB troika is acceptable is political posturing for him and his party to look good when Greece defaults. This is neither here nor there in terms of stopping the inevitable.
2. The imminent Grexit, which ATCA 5000 predicted in detail over the last five years, and more recently last weekend, is bad for faith in the Euro currency as well as the European Union and contagion is widely underestimated.
3. The bank runs, the bank holidays, the defaults and collapse of the Greek banking system are likely to infect weak Eurozone countries beyond Greece at some stage. This is defined as financial contagion in which a financial infection associated with lack of trust in banking and bonds is transferred from one country to the next.
4. Portugal, Italy and Ireland appear most vulnerable and are likely to be next in the firing line in regard to this financial infection. Why do we conclude that?
5. Contagion would require one or more of the following to happen:
a. Decreasing faith in public or government debt sustainability –- Public debt to GDP ratios for a wide selection of Eurozone counties as measured via the IMF and CIA data averages work out as follows: Greece = 158%; Portugal = 115%; Italy = 114%; Ireland = 110% and Spain = 78%. These countries, with perhaps the exception of Spain, are the most vulnerable because they are possibly not living within their means. By contrast let us look at the more manageable and conservative public debt to GDP ratios of the following richer countries in the Eurozone: France = 87%; Germany = 69%; Austria = 64%; and Netherlands = 50%. France is clearly the most vulnerable amongst the richer Eurozone nations. So does this not explain, why German, Austrian and Dutch bonds trade at a premium and why Greek, Portuguese, Italian and Irish bonds trade at a discount on the world markets even though they are all denominated in euros? What is going to happen as Greece defaults?
b. Self-reinforcing worries of refinancing difficulties –- Although the European Central Bank or ECB’s bond purchase programme provides a guaranteed buyer of bonds in the secondary bond market, given the Grexit and Greek default, it is now becoming clear that even the ECB cannot rescue over exposed Eurozone economies from political risk.
c. Bank runs in deposit- or interbank markets -- Beyond the damage in the bond markets, just as soon as signs of deposit bank runs in other vulnerable countries such as Portugal, Italy and Ireland are visible, the contagion will be manifest.
d. Economic effects –- Greece’s share of Europe’s aggregate demand is small, and its supply is non-critical to the functioning of the rest of the euro area. However, this is certainly not the case for Italy, which is the Eurozone's third largest economy and an industrial-agricultural giant in comparison to Greece, Portugal or Ireland.
e. Redenomination risk – Currently no country in the euro area considers returning to their national currency and forcing devaluation losses to the foreign investors. Greece, when it is forced to do this, will tear up the rule book for the Eurozone and a whole raft of incorrect assumptions in regard to Eurozone countries will have to be set on fire by international investors and creditors.
f. Political risk – This is the major risk that Greece is likely to cause, and it is highly unpredictable because it is based on crowd psychology.
All fiat currency is based on a confidence trick and when the trust in regard to an artificial currency union in the euro -- mixing the strong and the weak economies without a political union as witnessed in the case of the American dollar -- is quasi-broken, it will damage the currency, vulnerable governments' bonds and other weaker risky assets across Europe denominated in euros.
6. At this late stage, secret talk amongst the European power brokers and elite is centred around how to prevent contagion in other Eurozone nation states.
7. The answer to the bigger question of stabilisation and preventing contagion primarily relies on the ECB buying everything in sight to stop bond contagion. However, this may or may not work.
8. Despite what the European leaders may say about the locality of contagion because of the Grexit to assuage wider concerns, let us not underestimate the Grexit's impact in creating significant European political turmoil and crisis-of-confidence as fears of contagion heighten.
9. The step-by-step departure of Greece from the Eurozone and the European Union, because one is not possible without the other, creates a bigger political risk than that which is factored into the financial markets' calculus and is likely to spawn a number of cascading risks, causing massive volatility in the currency, bond and equity markets both within Europe and globally in the medium term.
10. In the short term, the ECB may be able to contain the risk until the wallpaper comes off and exposes the structural cracks within the Eurozone's flawed currency architecture and management system via Target2.
It cannot be business as usual when a Eurozone member, however small such as Greece, defaults! The reputation of the European Union (EU) and the European Central Bank (ECB) as over-arching guarantors will be in tatters for a number of reasons including letting the philosophical fountain of Europe, the birthplace of democracy, go. As chaos engulfs Greece and is constantly playing on television screens around the world, this may spell the beginning of the end of the European Union's expansionist policy based on constantly adding the good, the bad and the ugly in its fold and moving perpetually Eastwards and Southwards. A never ending quest to increase Europe's territorial, political, economic and financial might may come to a sudden and bitter end somewhat like when the USSR's quest to achieve the same came to an abrupt end in Afghanistan a decade after their invasion in 1979. The consequences of that loss of control were felt globally including the collapse of the Berlin Wall in 1989 and eventually the end of the Soviet Union in 1991. The political risk consequences of Greece's departure for the European Union cannot and should not be underestimated, because they are not benign and there-in lie the seeds of infection, contagion and a colossal financial and economic pandemic. In retrospect, the American Federal Reserve' chair of the board of governors admitted that they should not have let Lehman Brothers go and trying to make an example of it backfired. Will the ECB's president make a similar public lamentation in years to come in regard to Greece as the disentanglement of the European Union, the Eurozone and the ECB accelerates beginning with Target2's hole in the chest caused by Greece?