Zoellick and Draghi Admit: It's Over
June 3, 2012 • 9:18AM

The heads of two of the leading financial institutions have candidly admitted that the entire trans-Atlantic financial system is doomed in the very short term, unless something radical is done. Robert Zoellick, who leaves his post as President of the World Bank at the end of June, penned an oped in the Financial Times on Thursday, May 31, in which he frankly admitted that the European system was at a break point, and that if Greece were to leave the euro, there is no way to contain the contagion.

"While those living in the euro-zone building, especially those on the executive floors, will not want to hear an alarm, they had best read the instructions. Events in Greece could trigger financial fright in Spain, Italy and across the euro zone, pushing Europe into a danger zone," Zoellick wrote. "If Greece leaves the euro-zone, the contagion is impossible to predict, just as Lehman (Brothers collapse) had unexpected consequences."

Zoellick wrote that Europe "may be nearing a 'break the glass' moment: when one smashes the pane protecting the emergency fire alarm," warning, "If a crisis does occur, the European Central Bank may not have the ability to respond fast, fully, and forcefully because of differences on the bank's board."

"A Greek exit would trigger a hit to confidence in other sovereign euro assets. Euro zone leaders need to be ready. There will not be time for meetings of finance ministers to discuss the outlook and debate the politics of incrementalism. In panicked markets, investors flee to safe assets, sparking other flames."

Zoellick's blunt warnings were echoed the same day by European Central Bank head Mario Draghi, who addressed the European Parliament in similar apocalyptic terms. Urging European political leaders to drop their differences and take bold action, he posed the questions: "Can the ECB fill the vacuum of lack of action by national governments on fiscal growth? The answer is no. Can the ECB fill the vacuum of the lack of action by national governments on the structural problem? The answer is no." Draghi's conclusion: Without more aggressive action by the EMU's 17 heads of state, the euro "is being shown now to be unsustainable unless further steps are to be undertaken."

Businessweek reported on June 1 that a study by Société Générale SA concluded that a Greek pullout of the euro would bring the entire house of cards down. "Although the direct costs of a Greek exit may be manageable, the reality is that such an event would demonstrate to financial markets that the single currency was not 'irrevocable.' The contagion from a Greek exit may therefore prove difficult to contain in an environment where both banks and sovereigns are already facing significant funding difficulties. It is not hard to envisage a situation where the available official sources of funding are quickly exhausted."

The report concluded that a Greek exit "would undoubtedly unleash a wave of contagion transmitted through three main channels: potential deposit flight in other European countries, a significant increase in bank funding costs and the introduction of permanent currency risk premium into sovereign bond spreads. All of the euro area's existing firewalls would have to be employed to stem the contagion which would probably see the need for the ECB to reopen its securities markets program and potentially conduct another LTRO."

Of course, when it comes to solutions, Zoellick, Draghi and the rest are as bankrupt as the euro. They are calling for ridiculous half-ass measures like a European-wide FDIC depositors insurance fund, Eurobonds and a globalization of the bailout of the European bank and sovereign debt. Nothing short of a total Glass-Steagall separation and the cancellation of all the gambling debts is going to work. All of these fools are caught in the same Malaysian Monkey Trap—and the nut inside the jar is the bailout policy, which they can't let go of.