Tags: Greece | Grexit | eurozone | banks | markets

Larry Summers Calls Possible Greek Exit From Eurozone 'Dangerous Experiment'

By    |   Tuesday, 30 June 2015 08:29 AM

The decision by the Greek government to schedule a referendum for Sunday over whether to leave or remain in the eurozone added to the uncertainly as to how this scenario is going to play out and caused financial markets to sell off, a phenomenon known in the bullish camp as a “buying opportunity.”

Former Treasury Secretary Larry Summers appeared on CNBC to warn about the potential adverse effects of a Grexit as the Greek government imposed capital controls. Summers urged the parties to focus on “how Greece can grow at a reasonable rate” out of a hole he called “worse than the American Great Depression, with GDP having fallen by 25%.” He criticized the IMF for a “preoccupation” over whether the Greek VAT tax would have three or four brackets. Becky Quick asked, “What’s in it for the Greeks to stay in the EU?” Summers allowed that Greek exports would benefit, but he called this a “dangerous experiment,” because “It’s hard to see how the banking system would survive,” and needed investment would be discouraged. A question these articles have raised that prominent commentators have generally ignored is the role of TBTF banks in contributing to this and other international debt crises.

Alistair Newton, Senior Political Analyst at Nomura, addresses the “hyperbole” surrounding the current episode, beginning with the fact that it is not clear that the referendum is a real plebiscite over the future of Greece and the euro. Second, he reminds viewers that there is no mechanism for kicking Greece out of the Eurozone. He observed that, “One of the most interesting things about this situation is that there really are no black and white rules, when it comes down to it.” He noted further that in the past Europe has been “flexible about their interpretation” of Eurozone rules, and the ECB has been helpful. In response to the interviewer Karen as to what the best course is for Greece, he suggesteded that it is to go back to the table. He concluded that if the Greeks vote in favor of the bailout, the prime minister must resign.

Mark Luschini, Chief Investment Strategist at Janney Montgomery Scott, expresses surprise at the reaction of European markets to the events in Greece. He cited the protracted opportunity for EU officials to contain any potential contagion. He counseled caution for investors, suggesting they keep in mind that the crisis could still be resolved, even Greek stocks could rally, and with Greece contributing only 2% to GDP, the euro would benefit if Greece left. This writer would note that other commentators have said that the German elite would not favor a stronger euro, because it would act as a headwind for German exports. Luschini recommends that investors create a shopping list that would include European banks.

Michael Temple, of Pioneer Investments, compares the prospect of a Fed bailout to the Greek crisis as a source of risk to investors, and he finds the potential Fed move to be “the more significant event.” Specifically, he sees an earlier than expected rate rise as “the greater risk to fixed income markets in the U.S.” This is interesting because it tends to confirm that markets are apprehensive about a rate hike. Temple referred to a prediction by New York Fed President Dudley that the Fed will act in September. However, this writer would point out that Chair Yellen herself has raised the prospect of March 2016 and the IMF’s Lagarde has urged delay.

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Robert-Feinberg
The decision by the Greek government to schedule a referendum for Sunday over whether to leave or remain in the eurozone added to the uncertainly as to how this scenario is going to play out and caused financial markets to sell off.
Grexit, eurozone, banks, markets
578
2015-29-30
Tuesday, 30 June 2015 08:29 AM
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