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TMFMmbop (40.02)

Greek Default Unavoidable?

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April 07, 2010 – Comments (5)

The Greece crisismongers are back in the news today following a frontpage story in The WSJ (initially reported yesterday) that Greek bond yields have spiked to more than 7% (which, again, would blow their austerity plan out of the water). The good folks over at Zerohedge, for example, are claiming that Greece is "done." Bloomberg is reporting that a Greek default is unavoidable with more aid.

You may be wondering how this fits with our recent special report (GG membership required) on the Greece situation -- with three picks to profit from the Greek crisis -- which takes a somewhat more optimistic view.

First, we agree that a Greek default is unavoidable without help. The country doesn't have the money to pay back its debt and it can't continue to pay these bond yields.

What Greece does have in place, however, is a longer-term austerity plan that is both accepted in Greece and should be able to buy it time to get its financial house in order as long as the EU steps up to the plate with financial assistance and doesn't let a member-state default. Before traveling to Greece, we thought the EU would be willing to let Greece burn. We no longer think that. There is political will to keep the EU intact among the political elites and there is no way legally for Greece to walk out on the EU or vice versa.

But even if the EU does step up, Greece's debt problems are not going away. It will get messy before it gets better, but these reports today are largely harping on previously-known facts. There is no real new news.

The question is just will Greece to be able to blur its balance sheet more broadly into the EU. If it can, then there will not be a default. If it cannot, then there will.

5 Comments – Post Your Own

#1) On April 07, 2010 at 3:58 PM, leohaas (32.73) wrote:

Maybe it is unavoidable. But in general, we in the US have been making WAY too much about this issue. Greece defaulting in the EU is roughly the same as say Idaho defaulting in the US: bad for those who hold their debt, but a non-event in the grander scheme of things...

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#2) On April 07, 2010 at 4:38 PM, davejh23 (< 20) wrote:

I agree with leohaas...even if they default, what impact does this really have on the global economy?  If any EU assistance involves more borrowing at near market rates, I think default is guaranteed.  However, this probably isn't as large a problem as some make it out to be unless it's followed by defaults in Spain, etc...

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#3) On April 07, 2010 at 4:57 PM, TMFMmbop (40.02) wrote:

Well, unless you believe in the canary in the coal mine type of stuff...

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#4) On April 07, 2010 at 9:14 PM, ChrisGraley (29.89) wrote:

It's the fact that when Greece falls, the rest of the PIGS follow that's the problem. This screws up the value of the Euro and the economic valuations of the larger European countries.

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#5) On April 07, 2010 at 9:41 PM, starbucks4ever (98.68) wrote:

If they don't bail out Greece, then people will assume that other PIGS won't get their bailout either. Then they will sell piggish bonds and the PIGS defaults which had been in the pipeline, but not immediately imminent, will actualize in a matter of months.

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