Monday, January 19, 2009

Death Watch: Greece, and What Its Default Could Mean

The biggest threat to the U.S. Obama rally and the miracle recovery proposed by Democrats in the $825 billion bail out package may possibly reside about 6,000 miles away in Greece. On Wednesday, Greece became the first "Western" European country, and EU member, to have its ratings cut by S&P in recent years (link to S&P assessment here). Greece's debt is a staggering 98% of 2009 GDP (the U.S. with its estimated $10 trillion of debt is at about 70% of GDP). Thomas Mayer, chief European economist at Deustche said "The downgrade of Greece is a wake-up call to everyone that there is a price to pay for taking on big levels of debt." Wow Thomas, no kidding. So what does a potential default by Greece mean for the European Union? Short answer - nobody knows. The FT tries to present some scenarios of what a bail out of Greece would look like, none of which are attractive, with the worst case summarized as "you could conceive of a scenario under which the bail-out had to be so large that it would bring down the entire system. This could then provide the non-defaulters with an economic incentive to leave."

Could a Greece default have a domino effect of dismantling the European Union? Time will tell. In the meantime as S&P is going down the list of potential downgrades, here are some standouts in the debt/GDP category: Austria: 65%; Belgium: 85%; Germany: 65%; Italy 102%; Japan 111%; Portugal: 61% and UK: 53%.
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3 comments:

Χρηστος Χριστοφης said...

YOU SEEM TO BE A WISE GUY. BUT YOU GIVE TOO MUCH CREDIT TO THE FT. NO HARD FEELINGS THOW ABOUT THE BRITS THEY WERE THE ONLY TO LEND GREECE AFTER THE REVOLUTION OF 1821! ALSO YOU MUST TAKE INTO ACCOUNT BOTH PRIVATE AND PUBLIC DEBT AND FINALLY THE METHOD EACH COUNTRY COUNTS GDP.

Anonymous said...

where did you get those numbers?

Anonymous said...

I think default is always a good idea. However, it should be coordinated with other countries. Sacrificing Greece alone early in the game is evil. All countries should default simultaneously and start afresh.

Currently, all entities should be bailed out by the Federal governments by taking "toxic assets" i.e. "garbage" on their balance sheet. Then a coordinated simultaneous default followed by new currencies in every country.

There after we will be fine for the next 30 years. Then repeat.