I have been anticipating a possible Greece’s default for quite a while now, and it’s going to happen just as a matter of time, not as a matter of if. The reasons are simple: you have a struggling economy in which the government is imposing austerity, and that will take growth away, making the deficit reduction even harder, and the economic output would shrinks even deeper. It has been very apparent, as a result, that Greece has consistently failed to meet deficit target, and the GDP has been shrinking more rapidly than official forecasts.
The credit market has voted with its feet, with the CDS pricing 90%+ chance of default, and Greek 1-year government bond yield is now at almost 100%. In the event of default, we know for sure that Greece’s bank will most probably be insolvent as they write-down their holdings of government bonds. In other countries in Europe, French banks have largest exposure to Greece, and Germany comes next. We also know that US banks have sizeable indirect exposure to Greece, which I would speculate that it’s related to derivatives. But beyond that, perhaps a Greek default is manageable because it’s a relatively small economy? Well, I think anyone who claim that he/she has any idea what will happen, he/she is lying. Will there be contagion to other peripheral countries? What will happen in the banking system if there is indeed contagion? What about the curious indirect exposure by US banks? The list of questions go on and on.
In today’s interconnected global financial system, the links between different parts are close, but at the same time not always well understood. Yes, Greece default is no longer unthinkable, but the consequence of it will be unthinkable. No, I don’t know if that will be extremely disastrous. Perhaps it will not, but my feeling is that it has potentially more serious consequence that the fall of Lehman Brothers.
We shall see.
This article originally appeared here: Some Quick Thoughts On Greece’s Potential Default
Also sprach Analyst – World & China Economy, Global Finance, Real Estate
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