How Bad is it?

I do not know what will happen next in the Eurozone. But the situation is not good. Since I posted last Saturday on the the trouble in Italy, things have worsened–the ten year yield on the Italian bond today stands at 7.25–dramatically higher than the very dangerous level I spotlighted at the close of Friday.

Here is a canvas of expert opinion:

Alistair Darling, Former UK Chancellor of the Exchequer: “I despair of the way in which EU leaders are constantly behind events. I do not think enough people realise how serious this crisis is, and how hard it is going to hit us. This is far worse than the banking crisis of 2008.”

Paul Krugman, Noble Prize Winning Economist: “I believe that the ECB rate hike earlier this year will go down in history as a classic example of policy idiocy. We would probably still be in this mess even if the ECB hadn’t raised rates, but the sheer stupidity of obsessing over inflation when the euro was obviously at risk boggles the mind. I still find it hard to believe that the euro will fail; but it seems equally hard to believe that Europe will do what’s needed to avoid that failure. Irresistible force, meet immovable object — and watch the explosion.”

Jim Rogers, legendary hedge fund manager: “We’re certainly going to have more crises coming out of Europe and America; the world is in trouble. The world has been spending staggering amounts of money that it doesn’t have for a few decades now, and it’s all coming home to roost now. Last time, America quadrupled its debt. The system is much more extended now, and America cannot quadruple its debt again. Greece cannot double its debt again. The next time around is going to be much worse. In 2002 it was bad, in 2008 it was worse and 2012 or 2013 is going to be worse still – be careful.”

Jeremy Warner, business columnist for the London Telegraph: “[UK] Treasury analysis points to negative consequences for the UK from a disorderly break-up of the euro, with economic contraction and financial chaos at least as bad as that which followed the Lehman Brothers collapse three years ago.With the Government’s deficit reduction strategy in ruins, interest rates would soar, condemning the UK to the sort of disastrous debt dynamics which have engulfed Italy. The whole of Europe would soon slip into prolonged depression. The UK economy may already be in some form of renewed recession and a eurozone breakdown would multiply its effects. But despite the threats posed, there is still very little sign of the eurozone adopting the policies necessary to save the single currency. As recently as last July, the ECB was still raising interest rates, greatly exacerbating a serious economic slowdown outside its doors. Even if the euro survives, the austerity imposed on the eurozone periphery will deny growth and could condemn the single currency area to years of stagnation or worse.”

Simon Johnson, MIT economist and former IMF Chief Economist: “We have built a dangerous financial system in the United States and Europe. We must step back and reform the system. Like 1931, people thought the worst was behind them, but instead the crisis just broadened. The last crisis cost 50% of GDP and involved the socialization of losses but even that has failed to address the fundamental issues. We are looking straight into the face of a great depression.”

Brad Delong, UCal Economist and former Treasury Official: “Time to spread foam on the runway: The Federal Reserve needs to act Now to firewall off the Eurocrisis. I have been complaining for some time now that Reinhart and Rogoff think that the time is always 1931 and that we are always Austria–that the great fiscal crisis is about to erupt and send us lurching down toward Great Depression II. Well, right now guess what? The time is 1931, and we are Austria. The Federal Reserve needs to buy up every single European bond owned by every single American financial institution for cash before the increase in eurorisk leads American finance to tighten credit again and send us down into the double dip. The Federal Reserve needs to do so now.”

Christine Lagarde, Managing Director of the IMF: “There are clearly clouds on the horizon. Clouds on the horizon particularly in the advanced economies and particularly so in the EU and the United States. Our sense is that if we do not act boldly and if we do not act together, the economy around the world runs the risk of downward spiral of uncertainty, financial instability and potential collapse of global demand. We could run the risk of what some commentators are already calling the lost decade.”

From The Economist: “I have been examining and re-examining the situation, trying to find the potential happy ending. It isn’t there. The euro zone is in a death spiral. Markets are abandoning the periphery, including Italy, which is the world’s eighth largest economy and third largest bond market. This is triggering margin calls and leading banks to pull credit from the European market. This, in turn, is damaging the European economy, which is already being squeezed by the austerity programmes adopted in every large euro-zone economy. A weakening economy will damage revenues, undermining efforts at fiscal consolidation, further driving away investors and potentially triggering more austerity. The cycle will continue until something breaks. Eventually, one economy or another will face a true bank run and severe capital flight and will be forced to adopt capital controls. At that point, it will effectively be out of the euro area. What happens next isn’t clear, but it’s unlikely to be pretty.”

Ok, that is all pretty grim. But I worry things may still darken more. France is now seeing a rise in its cost of borrowing, and French financial strength is the only hope for any solution at this point. And, Spain now appears to be worsening too. Also, the margin required to hold Italian debt was increased so if investors want to continue to hold (or buy) Italian debt they need to pony up more cash. Imagine that, paying for the right to get hammered on an investment. Last, but not least, Germany and France are now openly discussing the break-up of the Eurozone, under something called “two-speed Europe.” Yikes!

On a more happy note: tomorrow must be better than today. Right?

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