Tags: Krugman | Italy | Euro | bank

Krugman: Italy to Leave Euro, Sparking Bank Run

By    |   Friday, 04 Nov 2011 07:53 AM

Interest rates on Italian bonds have simply risen too high to be sustainable, economist Paul Krugman writes in is column for The New York Times.

Investors were demanding 6.29 percent interest rates for Italian 10-year bonds when Krugman published his blog. At that level, the cost of rolling over its existing debt will lead to a default, even though Italy has a primary surplus, he predicts. The rate had fall slightly to 6.138.

Soaring interest rates on Italian debt will lead to an enormous bank run due to both fears that Italian banks will default and fears that Italy will leave the euro. That, in turn, will lead to emergency bank closings followed by a decision to drop the euro and bring back the lira.
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"It all sounds apocalyptic and unreal. But how is this situation supposed to resolve itself?" Krugman asks.

The scenario can be avoided, he says, only if the European Central Bank changes its tactics – fast.

krugman200.jpg
Paul Krugman
(Getty Images photo)
"Next stop, France," Krugman writes, implying that France will be the next domino to fall.

Austerity measures designed to cut government spending will almost guarantee a recession, he asserts.

Krugman provides a blunt assessment: "Let’s just say that the euro was an inherently flawed idea that can work only given a strong European economy and a significant degree of inflation, plus open-ended credit to sovereigns facing speculative attack."

Instead of pursuing those ideas, euro zone leaders have brought their morality concepts to economics by implementing austerity measures and tightening their money supply despite low underlying inflation.

Without a lender of resort similar to the Federal Reserve in the U.S., Krugman writes, the euro is bound to disintegrate.

Most observers agree the euro zone situation is becoming more serious, even if they don't predict the euro zone will disintegrate. Banks are continuing to drop euros of troubled euro zone governments, as they consider the possibility of Greece defaulting and leaving the bloc, according to Reuters.

"The market value of the debt of the countries most under scrutiny is likely to decline further as banks unload sovereign bonds," Charles Dallara, managing director of the Institute of International Finance, told Reuters.

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Interest rates on Italian bonds have simply risen too high to be sustainable, economist Paul Krugman writes in is column for The New York Times. Investors were demanding 6.29 percent interest rates for Italian 10-year bonds when Krugman published his blog. At that level,...
Krugman,Italy,Euro,bank
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2011-53-04
Friday, 04 Nov 2011 07:53 AM
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