Potential Consequences of a Greek Default
Whilst Greece is only a small part of the EU economy (it accounts for less than 2% in combined GDP of the sixteen EU member states) the potential default on its sovereign debt may have significantly greater ramifications…
- The largest holders of Greek Sovereign debt are the Greek banks. There has never been a time when an insolvent country has had solvent banks. It would be expected that the Greek banks will experience balance sheet losses resulting in a strong likelihood of a ‘run’ on the banks and their ultimate insolvency.
- As at September 2009, the Greek government had raised around $272B from other European banks. A default would result in potential significant losses on these bank’s balance sheets. The primary inter-bank relationships with the Swiss ($78.6), French ($78.9B) and German ($43.2B) banks. This may also result in more “bank runs” and insolvency concerns…more bailouts???
- There is the risk of a contagion effect that may flow onto other governments and banks resulting in a spike in yields and potential liquidity crisis. Other governments at most risk include Portugal, Spain, Italy, and Ireland who all have significant levels of debt. Both Portugal and Spain have recently received credit rating downgrades by Standard and Poors.
- This type of contagion effect could very well flow into another global credit crisis resulting in another slowdown in the global economy. Government bailouts a second time around surely would not be possible.