Stocks rally on news of possible Greece bailout. What comes next?
Stocks rallied in the US and in Europe on Tuesday on expectations of an emergency European Union bailout for Greece. But Greece, with a ballooning national debt, is not out of the woods yet.
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But as a member of the 16-country eurozone, Greece is subject to the policies of the European Central Bank.Skip to next paragraph
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“It is inconceivable” that the ECB would print more money and allow inflation across Europe for the mere sake of one country, says Jay Bryson, a Wells Fargo economist and author of the Feb. 5 report “The Long Road Ahead for Greece (and Others).” Because 60 percent of Greece’s exports are sold in Europe, inflation of the euro won’t help Greece sell goods to its primary market," he says.
“Greece doesn’t have the luxury of cutting monetary policy,” Bryson said by telephone Tuesday in Charlotte, N. C.. “They’re between a rock and a hard place.”
So will Greece default?
Probably not, economists say.
After a week of speculation and resultant jitters on stock markets, economists now believe that either the European Union or the International Monetary Fund will come to Greece's rescue. This is expected to come along with reductions in Greece's government spending and an increase in taxes.
Expectations for a financial rescue of Greece sent US stocks soaring on Tuesday, putting the Dow Jones Industrial Average up 1.7 percent, and placing the market on track for its best one-day gain in three months.
“Somebody is going to help Greece out. Whether it’s an individual member of the EU or the auspices of the IMF, I think somebody is going to extend some aid,” says Bryson of Wells Fargo.
The United Kingdom and Ireland hold about 23 percent of the total outstanding Greek debt, followed by France at 11 percent and Italy at 6 percent. Those countries are unlikely to allow their money to disappear, and will instead extend a loan on strict terms.
What would happen if Greece did default?
However, it would erode confidence in other countries in similar financial situations, such as Portugal, Ireland, and Spain, which is one of the world’s 10th largest economies.
“It could have a contagion affect,” says Bryson. “It could potentially be a replay of when Lehman Brothers collapsed.”
When Lehman Brothers declared bankruptcy in 2008, “The real damage was the message the failure sent—that the government might not do everything it could to prevent struggling firms from failing chaotically," writes The Economist. "This led firms to reevaluate the trustworthiness of other banks (and their obligations) and to rush for safety, and this in turn led to crisis.”
Is this the beginning of the end for the eurozone?
“I don’t think the euro’s going to blow up tomorrow,” Bryson says, adding: “It does raise interesting political discussions."
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