From Volume 38, Issue 44 of EIR Online, Published November 11, 2011

Global Economic News

Preparing for Greek Exit from Euro, Banks Conduct 'Fire Drills'

Nov. 4 (EIRNS)—Bracing themselves for a Greek withdrawal from the euro, European banks, and U.S. banks that operate in Europe, are said to be conducting "fire drills"—beefing up their hedges against Greek exposure and having their lawyers review loan agreements with Greek companies, the Wall Street Journal reports today.

Amidst widespread and panicked discussion over the "mess" that would ensue should Greece return to its old currency, the drachma, banks are trying to figure out what would happen to their euro-denominated loans under such conditions. The Journal asserts that, of course, such a scenario is unlikely, but then notes frenzied activity and statements from European leaders that a Greek exit is indeed possible.

Corporate clients are now moving their money out of Greece as frequently as every day, fearing a sudden return to the drachma, the Journal reports. The Financial Times worries that should large amounts of Greek assets be moved to Germany, suddenly "a German euro is not the same as a Greek euro." And, it adds that if Greece leaves, "it would raise the question of whether other countries would be next."

Greek Tsunami Engulfs Italy

Nov. 1 (EIRNS)—Italy was the nation most severely affected by the run on stocks and bonds caused by Greece's decision to support the EU bailout. Yields on Italian ten-year bonds reached 6.34%, one notch closer to the 7% threshold considered to be "unsustainable." The Milan stock market collapsed by 6.8%, with large banks, such as Intesa Sanpaolo, plunging 15.8%, and Unicredit, 12.4%.

Pro-euro politicians and business leaders are blaming Italian Prime Minister Silvio Berlusconi, insisting that he has not been able to supply a credible reform (i.e., austerity) program. President Giorgio Napolitano, a supranationalist, issued a statement urging the government to find broader parliamentary alliances—a de facto request for Berlusconi to resign. Napolitano has spoken almost every day in the recent period, in a breach of his constitutional prerogatives. Recently he called on the government to implement "unpopular decisions." Berlusconi said that the Italian government will act "with rigor and decision."

The issue, however, is not Berlusconi—or at least not for the reasons the City of London is advancing to demand his scalp. Ambrose Evans-Pritchard asked in his Nov. 1 London Daily Telegraph column: Are such sweeping reforms of pensions, labor rights and public service "to be decided by Italy's elected Parliament by proper process, or be pushed through by foreign dictate when the country is on its knees? 'Political ownership' is of critical importance. The EU is crossing lines everywhere, forgetting that it remains no more than a treaty organization of sovereign states. Democratic accountability is breaking down."

Thus, when an Italian Labor Minister Maurizio Sacconi warns that "a rushed shake-up of the labor market—as demanded by the EU—risks setting off a fresh cycle of terrorism in the country," the issue is that the EU "is in effect taking sides in an intensely polarized debate within Italy, intruding into the most sensitive matters of how society organizes itself. It is demanding ideological changes—in this case in favor of employers, and against unions—as a condition for further action to shore up Italy's bond markets."

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