Of Europe’s basket case financial economies (though we’ll point out that the U.S. could soon fall into the basket case category as well), Greece still sticks out like a sore thumb.Just look at this comparison of each PIIGS nations’ twin deficits:
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Or CDS spreads:
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While it is pretty well known by now that Greece is in definite trouble, Europe’s other teetering economies could easily fall like dominoes if a Greek crisis is mishandled according to Goldman.
Goldman: The twin deficits provide some guidance to the relative vulnerabilities (Chart 1), and in terms of comparisons of public-sector debt sustainability, these other countries all require medium-term primary surpluses that are only a fraction of Greece’s to stabilise their debt ratios for the same growth rate and real interest rate. That said, the entire Euro-zone periphery faces large financing needs and, to contain the cost of this financing, governments have started to outline fiscal measures to be implemented this year. Table 1 summarizes the key macro financial indicators for the Euro-zone periphery.
Contagion across Southern Europe will be a function of the policy reaction in Greece, the timing and extent of non-commercial financial support (if it turns out to be necessary), ECB policies and policy actions in the individual countries.
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So focus on Greece, and hope the Eurozone gets it right. Because the stakes are huge:
If contagion from Greece engulfs other countries, then up to 20%-30% of Euro-zone GDP could be under severe stress. Were a major financial instability event to develop, we would expect the ECB to pause in its exit strategy, and then, if needed, reverse course and reinstate longer-term financing.
(Via Goldman Sachs, The Euro-zone Challenge: Greece and Contagion, Erik F. Nielsen, 4 February 2010)