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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Hi Richard,
ReplyDeleteHow does the default pull down Euro?
In my view, I think the amount isn't really big to cause a country go down. No mentioning about Greece. It's such a small country. Would a $700b make a Union to do under? I doubt on it.
I don't know just asking and share my view.
but to me it's doesn't make sense.
Thank you for your comments, but I must say i disagree. The Greek economy really is at risk of collapsing, the country's debt amounts to 150% of its annual GDP. If Greece were to default, it would lose access to lending. It would also crucially drive up borrowing costs for other struggling peripheral nations and could plunge them into similar crises.
ReplyDeleteA Greek default may not collapse the union itself, but it would be very serious indeed. Many are arguing that it would have more disastrous effects than the Lehman's Brothers collapse that triggered the recent global recession.
The euro (the currency) would certainly decline as a result of genuine Greek default. Though this would be broadly positive for europe economically.
Richard Driver
Caxton FX Currency Analyst
Let's also remember that the European Central Bank has exposure to the PIIGS countries of €444 billion; a 4.25% drop in asset values would bankrupt the ECB.
ReplyDelete