Euro Strength Seen by Stiglitz Removing Greek Debt
Rather than a euro failure, an orderly Greek exit from the currency has Nobel laureate Joseph Stiglitz and Nomura Holdings Inc. chief strategist Jens Nordvig predicting a stronger and more stable monetary union.
While Societe Generale SA suggests that the euro might break up because of the cost of Greece’s departure, the nation accounts for just 2.3 percent of the 17-nation trading bloc’s gross domestic product. It also has 356 billion euros ($449 billion), or 4.3 percent of the region’s total debt, according to data compiled by Bloomberg. The area’s trade deficit last year would have been a surplus without its weakest member, according to European Union data.
“If you can weather the storm and haven’t put your bets too short term, probably the euro is going to go up,” Stiglitz, a professor at Columbia University and winner of the 2001 Nobel Prize in economics, said in a June 4 interview at Bloomberg’s New York headquarters. Stiglitz, 69, said losing Greece would strengthen the bloc. “It’s likely there will survive some rump version,” centered on Germany, he said. If it includes countries such as France, the “euro would likely appreciate.”
Foreign-exchange markets display little evidence of the euro being dismembered. The currency traded at $1.2603 at 9:01 a.m. in London, 53 percent above its record low of 82.30 U.S. cents in October 2000. Bond yields of Austria, Belgium, Finland, France, Germany and the Netherlands have fallen to record lows, as investor demand for their debt increases. Removing Greece from the euro would reduce the bloc’s debt-to-GDP ratio to 85.5 percent from 87.3 percent.
Part of the reason is that Germany, the world’s fourth- biggest economy, has posted a trade surplus every month since May 1991 and has avoided falling into recession since 2009. It is also the biggest contributor to the bailout fund, which has rescued Greece, Portugal and Ireland, pledging 211 billion euros to the European Financial Stability Facility.
Spain became the fourth euro member to seek a bailout since the start of the region’s debt crisis more than two years ago with a June 9 request for as much as 100 billion euros to rescue its banks.
A euro without Greece might rise as much as 8 percent, said Nordvig, a finalist for this year’s Wolfson Economics Prize, the second-largest cash award in economics after the Nobel Prize.
“If a Greek exit is followed by additional integration in the core, then the euro can recover,” Nordvig wrote in a June 8 e-mail. “If no additional integration is achieved, then capital flight will escalate,” and the euro could fall to as low as $1.10, he said.
The median estimate of 57 strategists surveyed by Bloomberg is for the euro to trade at $1.26 by the end of the year, dip to $1.25 in 2013, and then strengthen each year until it reaches $1.30 in 2016.
The currency climbed as high as to $1.2671 today, the strongest since May 23. It has still weakened 2.7 percent this year. Against the yen, the shared currency strengthened 1 percent to 100.49 and is up 0.8 percent since December.
Hedge funds and other large speculators, which had reduced trades that would profit from a drop in the euro to the lowest levels since November, rebuilt them to a record high of 214,418 last week, figures released June 8 by the Washington-based Commodity Futures Trading Commission showed.
Declines this year have left the euro undervalued against 10 of 12 major counterparts, according to an Organization for Economic Cooperation and Development index that uses relative costs of goods and services.
Greece is the main culprit. Had it not been part of the currency union last year, growth for the 16 other nations would have been 1.7 percent rather than 1.5 percent, according to data from Bloomberg and Eurostat, the EU’s statistics office in Luxembourg. The euro area had a trade deficit of 11 billion euros in 2011, while it would have had a surplus of 9.8 billion euros without Greece.
The area’s economy didn’t grow in the first three months, avoiding a recession only through German expansion. Eight of the economies contracted, with Greek GDP falling 6.5 percent from a year earlier. This was the country’s 13th contraction in the past 14 quarters, the Athens-based Hellenic Statistical Authority said June 8.
Germany, which accounts for 27 percent of the bloc’s GDP, expanded 1.2 percent on a year-over-year basis and 0.5 percent from the fourth quarter of last year, the Federal Statistics Office reported in May.
“We stand ready to act,” Draghi told reporters in Frankfurt after the ECB left its benchmark rate at 1 percent. The Group of Seven nations agreed to coordinate their response to Europe’s turmoil on June 5.
Odds on a euro breakup by the end of this year rose to 39.4 percent as of June 1 from 22 percent on May 4, data compiled by Dublin-based Intrade show. The probability of that happening by the end of 2013 has risen to 57.6 percent.
Direct costs of such a change may reach 360 billion euros, or 3.8 percent of euro-area GDP, sparking uncontrollable contagion that may exhaust official funding sources, Societe Generale said in a June 1 report.
The move would “demonstrate to financial markets that the single currency was not irrevocable,” the bank said. “The contagion from a Greek exit may therefore prove difficult to contain.”
European leaders have a three-month window to “correct their mistakes and reverse the current trends,” billionaire investor George Soros said in prepared remarks for a June 2 speech at the Festival of Economics in Italy, posted on his website. “The likelihood is that the euro will survive, because a breakup would be devastating not only for the periphery but also for Germany.”
While a departure would generate “chaos” in the short term, a newly traded drachma would be able to devalue against other currencies and return Greece to growth and more robust employment, Harvard University economist Martin Feldstein said June 7 from Copenhagen on Bloomberg Television. Feldstein, a former chief economic adviser to President Ronald Reagan, said in an interview in September that the single currency had proved to be a “failure.”
Greece wouldn’t greatly impact the remaining economies, Nordvig said. Private-sector bank losses would be much smaller today than they would have been two years ago as exposure has already been reduced through sales of Greek assets and the debt- swap deal in March, his analysis shows. A 30 percent decline in Greek imports from the remaining euro nations wouldn’t reduce any of the remaining nations’ economies by more than 0.3 percent, Nordvig said.
The shock might also result in needed reforms, said Elwin de Groot, senior market economist at Rabobank Nederland in Utrecht. It “would almost instantly make it one-minute-to- midnight and force the European leaders to take the decisions that have proved unpalatable so far, such as concrete steps toward economic integration, fiscal unity and the issuance of common debt,” he wrote in a June 7 e-mail.
One of the two parties leading the polls before a Greek election on June 17, Syriza, has said it won’t adhere to terms agreed to in the nation’s EU and International Monetary Fund bailouts, a move that may drive it to abandon the union.
“If Greece leaves because the country doesn’t want to fulfill its conditions anymore, then it’s better for the rest of the euro zone because the rest are more harmonized already and has more policy direction all together than if it has Greece inside it,” said Christian Schulz, an economist at Berenberg Bank in London and a former ECB official. Schulz is opposed to a Greek departure and said it should be avoided if possible.
Since Greece touched off the European debt turmoil in 2009 by reporting higher budget deficit figures than originally published, it has received two bailouts worth 240 billion euros and carried out the biggest-ever sovereign bond restructuring, which wiped away more than 100 billion euros of debt and half the principal owed to investors.
Even after the debt restructuring, the nation’s ratio of debt to GDP will be at 160 percent this year, down from 165 percent in 2011, the EU estimated in a March report.
While a Greek exit may cause some market turmoil at first, as investor concern of contagion to other nations increases, it will lead to a stronger and more stable currency bloc, according to Michael Cirami, who helps manage $12 billion at Boston-based Eaton Vance Corp.
“The euro zone looks like a problem area, and Greece remaining in the group doesn’t make sense,” Cirami said in a telephone interview May 30. “With respect to Greece leaving, I certainly think the euro zone will be better off in the medium to long term, but there will be a lot of pain in the short term.”