MidnightWatcher – Prophecy in Motion

By MATTHEW CRAFT – “NEW YORK (AP) — The unthinkable suddenly looks possible.

Bankers, governments and investors are preparing for Greece to stop using the euro as its currency, a move that could spread turmoil throughout the global financial system.

The worst case envisions governments defaulting on their debts, a run on European banks and a worldwide credit crunch reminiscent of the financial crisis in the fall of 2008.

A Greek election on Sunday will determine whether it happens. Syriza, a party opposed to the restrictions placed on Greece in exchange for a bailout from European neighbors, could do well.

If Syriza gains power and rejects the terms of the bailout, Greece could lose its lifeline, default on its debt and decide that it must print its own currency, the drachma, to stay afloat.

No one is sure how that would work because there is no mechanism in the European Union charter for a country leaving the euro. In the meantime, banks and investors have sketched out the ripple effects.

They think the path of a full-blown crisis would start in Greece, quickly move to the rest of Europe and then hit the U.S. Stocks and oil would plunge, the euro would sink against the U.S. dollar, and big banks would suffer losses on complex trades…

Here’s where things get scary.

The European Central Bank and European Union would have to persuade investors in government bonds that they will keep Portugal, Spain and Italy from following Greece out the door. Otherwise, borrowing costs for those countries would shoot higher.

The main way European leaders have tried to calm bond markets is by lending to weaker governments from two bailout funds. Experts say these two funds, designed as a financial firewall to stop the crisis from spreading, need more firepower.

Much of the (EURO)248 billion ($310 billion) left in one of them, the European Financial Stability Facility, was pledged by the same countries that may wind up needing it, Vamvakidis says.

There’s also a (EURO)500 billion European Stability Mechanism that’s supposed to be up and running next month, but Germany has yet to sign off on it.

‘If they fail to reassure bond investors, all of the nightmare scenarios come into play,’ says Robert Shapiro, a former U.S. undersecretary of commerce in the Clinton administration.

The biggest danger is a fast-spreading crisis known in financial circles as contagion – a term borrowed from medicine and familiar to anyone who has watched a disaster movie about killer viruses on the loose.

‘It’s like a disease that spreads on contact,’ says Mark Blythe, professor of international political economy at Brown University.” Read more.