Preparing for the worst

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Preparing for the worst

A “moment of truth” nears for Greece and the euro zone as the beleaguered nation holds elections on Sunday that could determine the path of its own as well as that of the broader continent. The general bet is that Greece will likely declare bankruptcy and exit the euro zone if the Greeks choose the far-left party Syriza that promised to reject the international bailout terms if it forms the next government.

On the other hand, Greece would get the much-needed bailout funds from the Troika ? the European Central Bank, European Commission and the International Monetary Fund ? if voters choose the pro-bailout coalition between the New Democracy and Socialist Pasok parties. The country in return would have to comply with tough terms on austerity, fiscal cuts and restructuring.

Investors have been dumping Spanish and Italian bonds as they remain skeptical about Spain’s troubled banks and the bailout cost on public finance even after the country was pledged rescue funding of 100 billion euros ($126 billion) by euro zone states. The yield on Spain’s 10-year government bond reached the dangerous threshold of 6.75 percent.

Moody’s downgraded Spain’s sovereign credit rating by three notches to Baa3, just a notch above the speculative grade on the rating agency’s scale. The 10-year Italian bond also topped 6 percent amid anxiety that Italy would be next to catch the liquidity crisis contagion.

The epidemic of debt crisis and liquidity crunch that broke out in the southern periphery is spreading quickly to the central part of the euro zone. Yields on safer assets of German and French bonds are also rising on skepticism about the euro’s prospects. EU leadership is being questioned due to its failed action plan over the last four years that has been a repeat bailout one after another without addressing fundamental problems.

The world’s eyes are now on Germany. Without Germany’s active involvement and sacrifice, the entire euro zone could lose ground. But the country, fearing a pinch on its sturdy budget, so far remains opposed to common bond issuance and larger commitment.

But so far there appears no other way to save the euro. We may have to brace for the worst-case scenario of a breakdown of the euro zone. Our foreign reserve coffers should be re-examined and a watch on foreign capital strengthened.

Moreover, authorities should come up with a contingency plan comprised of monetary and fiscal policy that can be immediately applied once an emergency situation arises.
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