I’ve been googling this for the last 45 mins - but still not satisfied with what I’ve seen. There are plenty of articles on major news providing sites eg BB/Reuters that talk about the fear of contagion - but no clear info as to how Greeks debt problems will be transmitted - possibly - to other EU nations and ultimately - possibly - the US. One tidbit I came across: “The real worry is the banking system. Some European banks hold part of the Greek debt and, if still saddled with unrecognised losses from the subprime crisis, some might become bankrupt. Many governments have simply not pushed their banks to straighten up their accounts, and they are now discovering some of the unforeseen consequences of supervisory forbearance.” My translation: If Greek cannot pay up, some half-dead banks will die. Can someone educate me? Cheers!
I’d be interested to know if that is true. Any bank that has exposure to GGBs so high that a partial default could lead to the bank requiring a bailout probably deserves to fail. I doubt there will be any partial default, although it is certainly possible. I still think the most likely outcome is for some fudge solution to be brokered whereby the debt is paid off in full with EU and IMF help. It’s going to be a rough few years for the Greek people. Any deal will come with severe austerity measured attached. Tax increases and spending cuts of maybe 10% of GDP (i.e. 25% of gov spending if Gov is 40% of the economy). The last thing any economy needs as it is trying to come out of recession is a public sector shrinking by 20%+ over 3-4 years. It will mean public sector salaries cut, teachers being let go, pensions being lowered etc. The Greeks are known for dramatic public protests and strikes. It is quite possible that these cutbacks will lead to widespread public unrest. It will need an extraordinary PR drive on the part of the politicians to prevent such an occurance.
speculation on other countries in a similar but not as bad ? portugal spain ireland greece didnt look so bad a few months ago, the other pigs dont look so bad now, in 3 months things could worsen considerably
anyone?
If Greece gets told to go screw themselves, then a lot of people who are worried about Spain, Portugal, Italy, and Ireland will conclude that those countries are going to be told to go screw themselves too. Those investors will get out of the bonds of these countries, driving up interest rates there and possibly create a self-fulfilling prophecy. Other investors will start to shun Europe more generally because of increased uncertainty. German and French banks who lent to Greece and other PIIGS will be hit badly too, hurting the financial system in core countries. Not pretty. Could this contagion spread outside Europe? That’s an interesting question. Not sure how, but I do think it could alter thinking about state debts in the US and do something here. Our system is not as fragmented as the european one, however. Politically, these types of events call for new institution building. Greece is a problem for the europeans that could easily repeat itself in the future. So what they really need to do for the long term is come up with a policy of how to deal with this type of problem. Most likely this will involve creating new bureaucracies, which could be good or bad, depending on how professionalized they are. Europeans don’t especially want to create more bureaucracy right now, because that could impinge on individual state sovereignty, and yet this is really what’s needed - a policy of clarity for how the EU resolves situations like this in the common currency zone.
Thanks chad, this all makes good sense to me.
bchadwick Wrote: ------------------------------------------------------- > If Greece gets told to go screw themselves, then a > lot of people who are worried about Spain, > Portugal, Italy, and Ireland will conclude that > those countries are going to be told to go screw > themselves too. Those investors will get out of > the bonds of these countries, driving up interest > rates there and possibly create a self-fulfilling > prophecy. Other investors will start to shun > Europe more generally because of increased > uncertainty. German and French banks who lent to > Greece and other PIIGS will be hit badly too, > hurting the financial system in core countries. > > Not pretty. > > Could this contagion spread outside Europe? > That’s an interesting question. Not sure how, but > I do think it could alter thinking about state > debts in the US and do something here. Our system > is not as fragmented as the european one, > however. > > Politically, these types of events call for new > institution building. Greece is a problem for the > europeans that could easily repeat itself in the > future. So what they really need to do for the > long term is come up with a policy of how to deal > with this type of problem. Most likely this will > involve creating new bureaucracies, which could be > good or bad, depending on how professionalized > they are. Europeans don’t especially want to > create more bureaucracy right now, because that > could impinge on individual state sovereignty, and > yet this is really what’s needed - a policy of > clarity for how the EU resolves situations like > this in the common currency zone. The problem with a Greek bailout though is that the citizens of Portugal and Spain are going to be looking for something similar as opposed to dealing with an austerity plan. There were riots in Greece when their plan was announced. Unemployment in spain in ~20%. How do impose a fiscal austerity plan on a country with 20% unemployment? The reason it’s difficult for it to spread is most other nations control both their monetary and fiscal policy so you can devalue your own currency. I think the euro is in serious trouble.
Chad off-course is the master of Macro Economics. Another way to look at this, is that Greece is the Sub-Prime of the Sovereign market. Now go back three years in time and recall what happened when HSBC announced that they lost a ton of money on their sub-prime RE portfolio. Worst case scenario would be a repeat here but replace “Sub-prime RE” with “Sub-prime Sovereign debt”. Paulson is probably long CDS betting against the PIIGS.
would like to quote british paper: The British banking system’s total exposure is £9.94 billion (to the teetering Greek economy). Britain is the fourth biggest lender to Greece, after France Germany and the US. RBS admitted its exposure was close to £1 billion. With the Greek government due to repay £7.4 billion of bonds by May 19, the odds of an unprecedented debt default soared today. A default could mean British banks having to write off billions of pounds from their Greek loans just as they are emerging from the global crisis. The interest rate on two-year Greek bonds hit 38% at one stage. The cost of insuring Greek debt soared and is now the most expensive in the world - suggesting investors fear a default is imminent.