Lothian: Decision to close Greek banks not surprising

James R. Lothian

James R. Lothian

Greece’s decision Monday to close its banks in an effort to slow the country’s financial crisis caught some “people a little bit by surprise,” one market analyst told The New York Times.

But Professor James R. Lothian, director of Fordham University’s Frank J. Petrilli Center for Research in International Finance, was not one of them.

Lothian, who last year published a paper on the financial crisis in the United States and the debt crisis in Europe, said other developments in the financial crisis were leading to this decision.

The professor, who also serves as the Toppeta Family Chair in Global Financial Markets, took the time to answer five questions on Greece’s action and its consequences.

Take heart, U.S. citizens: Lothian does not see any significant impact on the U.S. economy.

Here are Lothian’s responses to our questions, edited only for style:

1) Did the Greek move to close the banks this week surprise you? Why or why not?

I was not surprised given the other developments that occurred.  Greeks were withdrawing their Euro deposits in anticipation of the introduction of a new devalued drachma. The Greek government moved to check the bank run.

2) I see there has been some reaction to the crisis in the global markets so far. What do you think the longer-term impact will be on the global markets?

The principal long-term impact will be to make investors wary of other countries that have fiscal problems of the Greek variety. That will mean some widening of yield spreads on sovereign bonds.

3) Is there a potential for what is happening in Greece to spread to other European Union countries?

There is some potential, but it is limited. Greece’s problems are not totally unique, but most of the other European countries that were struggling have managed to stay afloat.  Cyprus is the only one that might go the Greek route now. 

The larger problem is that citizens in the economically healthier countries seem to be getting a bit fed up with the European project. This is particularly true of the British.

4) Do you foresee any impact at all for the American economy?

I do not see America being affected.  

5) What do you think the likely solution is for Greece’s woes?

I think they will end up inflating when they re-adopt the drachma.  They should take steps to cut back on government expenditures, but that may prove difficult politically.

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