Obama shrugs on Greece, while Wall Street frets

By Ben White

Analysts question president’s assertion that crisis is already `factored in’ by markets.

NEW YORK — President Barack Obama put on his market strategist hat on Tuesday and calmly declared that financial markets have “properly factored in” the risks of Greece’s increasingly dire financial woes and possible exit from the euro zone.
But Wall Street fears he might be wrong.

In the short term, analysts and traders say, Greece is too small to have much of an impact on the U.S. no matter what happens in its seemingly endless dance with European creditors. But if the nation ultimately leaves the euro zone it could set a dangerous precedent that may ultimately be followed by Spain, Italy and other European nations with weaker economies.
“I think Obama is wrong about it all being factored in,” said Megan Greene, chief economist at Manulife Asset Management in Boston. “I don’t think the impact of a Greek exit if it happens will be felt right away because it’s such a small economy. But if Greece leaves it sets a precedent that other countries could think very seriously about following.”
That in turn could create chaos across Europe in ways that would be deeply felt by an American economy growing at just 2 percent and very susceptible to any kind of shock. The impact would be largely felt by a collapse in confidence and market turbulence rather than any direct trading links between the U.S. and Europe, analysts say.
Still, the U.S. stock market mostly backed up Obama’s cool approach on Tuesday, closing largely flat after big declines on Monday even as Greece missed a $1.7 billion loan due to the International Monetary Fund amid a feverish round of new talks with creditors. Greek’s failure to make the payment put it in the same category as the Taliban in Afghanistan, Zimbabwe and Haiti.
But while traders took Tuesday’s Greek action in stride, there could be further big downturns ahead if no deal is struck and Greece and it is ultimately forced out of the euro zone. Wall Street will then naturally turn its collective mind to who could be next, much in the way it did with U.S. banks during the 2008 financial crisis when even strong financial institutions came under siege.
“Contagions are funny things and can start going places that people don’t expect and that central bankers can’t defend,” said Steve Massocca of Wedbush Equity Management in San Francisco. “You have a very strong left-wing political movement in Spain for instance. That could be the next ground zero after Greece.”
But while some Wall Street traders and economists disagree with Obama’s calm assessment of the impact of a potential Greek exit, they mostly agree that there is not a great deal more the administration could be doing to ensure an outcome that keeps Greece in the euro.
Obama on Tuesday said his administration is taking the situation seriously but that it shouldn’t prompt “overreactions.” Behind the scenes, Treasury Secretary Jack Lew continued to talk to European officials, urging both sides to come to new terms that would extend Greece’s 245 billion euro bailout while including significant budgetary reforms.
Lew on Tuesday spoke separately by telephone with Eurogroup President and Finance Minister of the Netherlands Jeroen Dijsselbloem, Italian Finance Minister Pier Carlo Padoan, and French Finance Minister Michel Sapin. According to a Treasury readout of the calls, Lew pressed for “commitments to further reforms in Greece and a path to debt sustainability with an eye toward a pragmatic compromise.”
According to Treasury officials, Lew has called or met with nine different counterparts in Europe 60 times over last 8 months. But the administration has stayed away from proposing specific terms of a possible deal, instead simply urging the parties to keep talking. Part of the reason for this, analysts, say, is that European creditors led by German Chancellor Angela Merkel are not at all receptive to American entreaties to ease terms on Greece.
Obama irritated Merkel and other creditors earlier this year when he said that they “cannot keep on squeezing countries that are in the midst of depression.” That was widely viewed as the president taking sides with Greece. And Obama has largely avoided wading into the fight directly since those remarks.
“The creditors are not really open to American views on this,” said Greene. “When Obama made those comments about squeezing economies it got huge press in Europe and the Germans didn’t really appreciate it and he hasn’t really touched the issue since.”
That has left the White House as a largely powerless observer of the Greek situation. Treasury officials continue to stress that even if Greece leaves the euro zone, there are now much stronger firewalls in place to prevent financial contagion.
“The [European Central Bank’s] vast array of tools, the euro area firewall, the European stability mechanism, the single supervisory mechanism, which is of particular help to the banking sector – these are all tools that could be deployed if it’s warranted by conditions in Greece,” a senior Treasury official said this week.
The unknown now is just how effective those tools will be if Greece cannot come to new terms with creditors. Greek Prime Minister Alexis Tsipras has called for a referendum for this Sunday on whether the country should accept creditors’ calls for more austerity. If the nation’s residents vote against signing a new deal it could push Greece out of the currency union and reignite the kind of spillover fears that dented the U.S. economy in 2012.
Goldman Sachs cited these fears in a client note warning that the impact of a Greek exit may not in fact be “factored in,” as Obama suggested.
“Spillovers through financial conditions … could potentially be much more sizable,” Goldman analysts wrote. “We estimated in 2012, for example, that the euro area sovereign crisis at its peak shaved as much as a percentage point off US real GDP growth through its adverse effect on US financial conditions.”
A repeat of such an impact would essentially cut U.S. growth in half and turn Obama’s final year and a half in office into a painful slog.
“This crisis is going to take a long time to play out and what is not priced in and what is worse than a Greek exit is the continuing, chronic lack of governance and cohesion in Europe,” said Ian Bremmer, founder of the Eurasia Group advisory firm. “And I think markets will have a very significant negative reaction if we were to see a ‘no’ vote in the referendum and a very fast collapse in Greece. I don’t think that’s priced in at all.”