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Paul Krugman: The Entire Euro Could Collapse in 'Months' -- and Here's How

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"a massive run on Italian and Spanish banks"

If you think that what's happening in Greece and Europe (read our post on Sunday for more background) isn't worth worrying about right now, think again. Imagine what would happen if the European currency collapsed -- the shock waves would disrupt the American economy instantly. The next question, then, is: How likely is it that the euro collapses? Paul Krugman, the New York Times economic columnist, says it could happen in months.

In a post on Sunday, he lays it out:

1. Greek euro exit, very possibly next month.

2. Huge withdrawals from Spanish and Italian banks, as depositors try to move their money to Germany.

3a. Maybe, just possibly, de facto controls, with banks forbidden to transfer deposits out of country and limits on cash withdrawals.

3b. Alternatively, or maybe in tandem, huge draws on ECB credit to keep the banks from collapsing.

4a. Germany has a choice. Accept huge indirect public claims on Italy and Spain, plus a drastic revision of strategy — basically, to give Spain in particular any hope you need both guarantees on its debt to hold borrowing costs down and a higher eurozone inflation target to make relative price adjustment possible; or:

4b. End of the euro.

And we’re talking about months, not years, for this to play out.

Let's let Business Insider (BI) translate that:

Greece leaves the euro "very possibly next month." That would lead to a massive run on Italian and Spanish banks. There would be massive borrowing from the ECB [European Central Bank] to prevent a banking collapse. At which point Germany has to decide: Shoulder a major burden for the debts of Spain/Italy, etc., or let it all go.

Now, BI says because of the potential consequences big investors won't let Greece leave (thus stopping the chain reaction at step one). But it's still a possibility. And as long as it's a possibility, it's one you should familiarize yourself with.

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