Jeremy Siegel: How A ‘Grexit’ Could Strengthen The Eurozone by Knowledge@Wharton
The debt crisis in Greece is quickly turning into a Greek tragedy. Banks have closed for a time, ATMs have cash limits and the stock market has not opened. Greece’s bailout expires on June 30, the same day its $1.8 billion debt payment is due to the International Monetary Fund. Greece reportedly will not pay it. Prime Minister Alex Tsipras has called for a July 5 referendum on the latest bailout terms by the IMF, the European Central Bank and the European Commission.
While the situation is dire for the Greeks, Wharton finance professor Jeremy Siegel says the crisis will likely be contained because of freer lending to banks in other countries. And if Greece does exit the European Union, he believes it will strengthen the eurozone. Jeremy Siegel points to the euro gaining ground even as news of Greek bank closings led to expected declines in the European capital markets — which were to a lesser extent reflected in the U.S. markets as a result of a flight to quality.
As for the impact of the crisis on the Fed’s intention to raise the federal funds rate later this year, Jeremy Siegel says the U.S. central bank will take the situation in Greece into account if it continues to be a problem months from now. But he does not believe the debt crisis will present enough anxiety for the Fed to derail an increase in the overnight bank lending rate. Jeremy Siegel expects the rate hike to come in September.
An edited transcript of the conversation appears below.
Knowledge@Wharton: Jeremy, give us your quick analysis of the situation in Greece and its impact on the markets. What do you think?
Jeremy Siegel: The situation is very serious in Greece. Closing the banks, closing the stock exchange, closing or restricting the ATMs already is having a devastating effect on tourism, which is a very big part of Greek economy. If the banks remain closed for at least a week until the referendum, we could see another sharp rise in unemployment and further decline in GDP. Greek GDP had already declined 25%. It could decline 10% more as a result of the closing of the banks. I believe that [European Central Bank President Mario] Draghi will “ring fence” Greece.?Twitter Although there is no lending to the Greek banks, he will liberally lend to the Portuguese, Spanish and Italian banks to prevent any spreading of this crisis beyond Greece. And as a result, it will be isolated to the Greek economy.
“The Greek people wanted a government that would deal tough with the Europeans, but they did not want a government that would go over the brink.”
I also believe that, given the terrible blow this will deal to the Greek economy, it is actually quite likely that the Greek people will accept the European conditions for the bailout, which were explicitly revealed … by the European institutions. The Greek people wanted a government that would deal tough with the Europeans, but they did not want a government that would go over the brink, and that is clearly what will happen — and has happened — as a result of closing the banks. I believe they will reject the [left-wing] Syriza [Party] and Tspiras platforms, which would likely lead to his resignation [as prime minister], since he is recommending a “No” vote on the referendum. So ultimately, this might be quite good for Greece if they accept the terms of the Europeans. Then the Europeans will start lending again to the banks, the banks will re-open, and a new set of conditions will be in place.
See the full transcript here.