Is Greece the catalyst for another panic?

That was the question that RT’s Lauren Lyster was asking last night. My short answer is not necessarily. The long answer is that policy makers have a lot of ways to continue the ball rolling. They can allow Greece to default and recapitalise the banks first and foremost. This may be costly, but they could just start with the most undercapitalised and continue on down the line as markets see more banks and more sovereigns running into problems. On Spain and Italy, the ECB will do their part – how much is the question and using what kind of quid pro quo.

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The bottom line is that financial Armageddon doesn’t happen overnight and Eurozone default is not synonymous with breakup. Angela Merkel, the German Chancellor, is even talking about a future ESM (European Stability Mechanism). So, there are a lot of missteps that get you from here to there.

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3 Comments
  1. Stefan says

    Ed, I frequently see the phrase “Allow Greece to default.”. Isn’t it their choice? What stops Greece from giving everyone a 50% haircut, regaining solvency and reentering the debt markets at a more reasonable GDP/debt?

    Thank you.

    1. Edward Harrison says

      Greece would never default unilaterally because it would be catastrophic for the Greek, European and world economy. Greek banks would be insolvent. Who would recapitalise these banks. European banks would take a huge capital hit and we would see a panic of global implications. An unorderly default is a real Armageddon scenario.

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