An interesting Robert Peston blog (BBC) with a somewhat doomsdayish tone discussed the possible ramifications of Greek default. The US exposure to the banks of the eurozone periphery is very significant. The US has the second largest exposure to Greece. A Greek default would almost certainly have knock-on effects throughout the European banking system, not least in the periphery. Worryingly for the US, it has the third largest exposure to Portuguese and Irish debt and a whole lot more vested in Spain, Italy and various other nations.
With the US debt ceiling debate still roaring on, the US banking system would be rocked by a Greek default and the others that would inevitably follow. The global economy would plunge back into a recession, that’s almost certain. Indeed, in light of the recent slowdown in global growth, some are forecasting a double-dip regardless.
What would the consequences of a genuine Greek default be for the single currency? Well, the euro has recovered strongly in the past week, in line with greater confidence that the Greek situation is verging on a resolution. GBP/EUR hit €1.16 and EUR/USD hit $1.40, but these two pairs are now at $1.12 and $1.46 respectively. Should the Greek situation truly implode (unlikely now), the euro would suffer hugely, and the survival of the euro itself would come into question. US banks will have been very encouraged by Merkel’s comments last week, indicating Germany’s commitment to the euro is as strong as ever.
Richard Driver
Analyst – Caxton FX
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