Greece: The view from Wall Street

The media are downplaying the impact of Greece’s woes. Are they off the mark?

Summary: Some parts of the financial press have hyped the story of Greece’s economic woes, but many articles also seek to minimise the effect that a Grexit could have on global investors. Markets had a muted reaction to the Greek vote results, one left-leaning economist argues a vote against austerity is better for Greece in the long run, and another columnist says the potential problems in the inflated Chinese stock market are more significant than Greece. But are these columnists making too little of the Greek situation?

Key take out: The scary possible outcome in Europe is not a Grexit, but the potential for other exits. Letting countries leave the euro does not solve an inevitable result of the currency system’s construction.

Key beneficiaries: General investors. Category: Economy.

There’s a widely-held belief among the citizenry that the press tends to overstate bad news in order to generate more readers and TV viewers.

As a member of the press, I’d argue that we are guilty as charged, particularly in the area of weather and crime coverage. Fear, after all, is the oxygen of the news business.

But the financial media appear to be much more measured in the way it covers a looming economic crisis than the general-interest press. Take, for example, the reaction to the five-year running story of Greece’s debt and economic woes and the more immediate news about the country’s vote Sunday to reject an austerity plan favoured by European leaders and creditors.

To be sure, some quarters in the financial press have done their share of hyping of this story. Central to that narrative is the notion that Greeks’ rejection of austerity will have a contagion effect on other weak southern European nations, including Spain, which has an unemployment rate almost as high as Greece’s.

But I’ve come across many articles today that seek to minimise the effect that Greece’s woes – even if they result in an exit from the eurozone – will have on both European and US investors.

I’m sure these writers are taking their cues in part from the muted reaction that the markets had to the Greek vote results. For example, pre-market futures trading suggested that the stock markets on both sides of the Atlantic would only be modestly down Monday because of the news. Indeed, shares of Vanguard FTSE Europe ETF (ticker: VGK) were off roughly 3 per cent Monday, while the iShares S&P 500 Trust (SPY) was only down 0.3 per cent.

Writing on his influential website, Pragmatic Capitalism, Cullen Roche makes a sweeping case for why Greece’s problems, even if they get worse, can be handled by markets.

For example, he writes that a Greek exit from the Eurozone, which alarmists view as some kind of worse-case scenario, “isn’t going to destroy the global economy”.

Greece, he points out, is a “remarkably small economy at just 2 per cent of Euro Area output and roughly the size of Louisiana. Further, their debt is relatively small and is now held mostly by other sovereigns. I assume the ECB will react proactively and responsibly to avoid contagion. So, it’s not all that rational to assume that this is some version of Lehman Brothers.”

These views are largely shared by Paul Krugman, the liberal economist and New York Times columnist.

Not surprisingly for a left-leaning economist, Krugman argues that a vote against austerity is better for Greece and Europe’s economy in the long run.

“A yes vote in Greece would have condemned the country to years more of suffering under policies that haven’t worked and in fact, given the arithmetic, can’t work: austerity probably shrinks the economy faster than it reduces debt, so that all the suffering serves no purpose,” writes Krugman. “The landslide victory of the “no” side offers at least a chance for an escape from this trap.”

Meanwhile, Brett Arends, a columnist with MarketWatch, sees little to worry about, even if Greece exits the eurozone.

“If Greece does leave the euro, there is absolutely no reason why Italy or Spain should follow suit. ‘Contagion’ is a word, not an argument,” writes Clements. “Launching a new currency, like a new Greek drachma, is perfectly manageable so long as the big international organisations like the IMF get involved. They helped former Soviet-bloc countries of Eastern Europe launch new currencies in the 1990s very successfully and with little pain. They can do the same with Greece if they want.”

Meanwhile, Paul La Monica, a veteran columnist with CNNMoney, writes that Greece’s woes pale in significance to the potential problems for US investors if the inflated Chinese stock market comes crashing down.

“Economists at the Royal Bank of Scotland tweeted out a chart last week that showed that US banks have nearly 10 times as much exposure to China than Greece,” writes La Monica. “And Kathleen Brooks, a research director for FOREX.com, wrote in a report Monday that ‘sentiment could suffer across the Asia region and further afield’ if China is unable to stop the bleeding in its stock market.”

But could it be that Arends, La Monica and others are making too little of Greece’s woes, especially if Greece’s rejection of austerity and a possible exit from the Eurozone inspires other nations to go down a similar path?

Pragmatic Capitalism’s Roche suggests as much in his piece. “Grexit will be very messy as it increases the odds of other countries leaving the euro,” he writes. “As I’ve described previously, the really scary outcome here is not Grexit, but the potential for other exits. At the aggregate level we know that the common currency will always cause a ‘Greece.’ So, without some form of transfer mechanism inside the Euro system this is a problem that will recur periodically in the coming years. Letting countries leave or kicking them out does not solve an inevitable result of the currency system’s construction.”


This piece has been reproduced with permission from Barron’s.