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Will talk of the debt struggles and spreading contagion in four of the five so-called European “PIIGS Nations” resemble a distant memory within one to two years? One of the foremost international macroeconomic minds said just that when speaking at last weekend FCIB New York International Roundtable. Still, the five and most debt-saddled of the PIIGS, Greece, isn’t likely going anywhere soon, either in its debt standing or its affiliation with the rest of the European Zone.
Matthew Higgins, vice president of the Federal Reserve Bank or New York, stated he believes there was reason to be hopeful for significant improvements in four of the five PIIGS economies, which could take some of the hot spotlight in the mainstream media away from them. To wit, Italy and Spain are demonstrating they’re each on a “credible track” as far as austerity goes, and even Ireland and Portugal have hit most of their targets post-bailout. The only “real” concern, Higgins speculated, was Greece.
“Europe easily has the capacity to roll off Greece from the others – There’s a reasonable chance we won’t be talking about this two years from now or, with luck, maybe one year,” he told FCIB attendees. “But clearly, Greece itself is a real challenge. They’re going through a very large fiscal austerity process that dwarfs that of the U.S.”
Still, the euro zone nations carrying the Greeks financially, as well as others more in the middle economically may have little punitive recourse, going forward. Higgins suggests that cutting Greece out of the European Union entirely would amount to an “enormously disruptive mess.”
“The legal infrastructure to do so doesn’t even exist,” said Higgins. “And all the contracts would have to be rewritten.”
Higgins believes it would go a long way to stabilizing or improving all-important market confidence if the EU were to take steps such as firmly establishing a bailout mechanism that is more flexible and providing clarity to what the banking exposure/the related backstop system was for it. Clearly, simply cutting the Greeks out of the equation in no way resembles a cure-all or even feasible option in the short- and mid-term.
Brian Shappell, NACM staff writer