Forecasts of an imminent Greek default and possibly Grexit, (Greece exiting the euro) abound. Following the first rule of successful forecasting, no one is willing to put the date and the event in the same sentence. Moreover, while both possibilities have been widely discussed, there is little agreement on what might happen. If Greece defaults it would be the largest collapse since Lehman Brothers but, hopefully, smaller and less disruptive.
The Greek government owes a lot of money, much of which comes due in the next several weeks. Based on reporting by the Guardian Newspaper the near term dates in May include a loan repayment of €760 million and an interest payment of €200 million to the IMF and two T-bills maturing for a total of €2.8 billion. June is larger: €5.2 billion of T-bills and almost €1.6 billion due to the IMF. There are still some government expenses, such as salaries, to pay. By most estimates Greece can probably gather about €2 billion.
Getting through May looks doubtful, but there have been other deadlines and dire warnings followed by temporary reprieves. No one know how long the money will last or who will blink first between Greece’s government and the troika of the European Central Bank, the European Commission and the IMF. All that can be said is that beginning now the risk that Greece defaults is getting larger and larger.
What will happen if Greece defaults? First, it will be the end of the beginning, not the beginning of the end; the morning after default the same problems will still be here. Some financial turmoil is inevitable. Greek banks, and possibly others, will close for a few days as will various other businesses. Stock markets across Europe are likely to drop sharply while markets in the Americas and Asia will slide but by less. Investors who have enjoyed a strong run in European markets so far in 2015 – the S&P Europe 350 measured in euros is up 19% since the start of the year – may see many of those gains vanish. But the real problem is not the immediate market turmoil; it is spreading failures, collapsing credit and contagion. Risks of bank and business failures or a credit freeze are greater inside Greece than elsewhere in the Eurozone. Outside of Europe financial damage will be less than inside.
Comparisons to Lehman Brothers are inevitable, but there are major differences. First, the world remembers 2008 and Lehman Brothers and people have been warned. In contrast, when Lehman was close to the end, most people expected the Fed and the US Treasury to stage a last minute rescue as they did six months before with Bear Stearns. No one expects an instant fix for Greece. Some have taken precautions – money has been flowing out of Greece to the rest of Europe for several months. Second, attention will shift to European countries which some investors worry about: Spain, Portugal, Ireland or Italy. The good news is that these are in better shape than a few years ago and in much better shape than Greece. Problems may spread, but a second Greece is unlikely to come from a default by the first. However, in one sense a Greek default would be like Lehman Brothers – there will be some big unexpected problems. With Lehman, such surprises included a massive squeeze on short term credit and incompatible bankruptcy laws in the US and the UK. We will have to wait to see what a Greek default brings us, if the default happens.
Grexit is politics, not economics. One motivation for the euro was assuring a stable and peaceful Europe where countries would trust one-another, where Germany’s faster growth and stronger economy would not splinter the continent or worse. A purely economic design for a euro would have included unified fiscal and banking systems and would not have looked the other way when countries failed to meet their fiscal policy commitments for entry. Leaving the euro would be extremely messy, for Greece or any member country. On day one after the euro the exiting nation would have no currency, no payments system and probably no credit.
Default and an exit from the euro are not absolutely linked. Given the calendar and debts, a default would come before Grexit if both occur. A default probably increases the probability of Grexit, but definitely doesn’t guarantee it. Neither default nor Grexit are inevitable. Greece has surprised before and avoided the inevitable. Grexit would be mired in politics and politics is even less forecastable than economics.
While most of the media and the blog sphere focuses on when default will happen, there is the Greek position explained by Yanis Varoufakis, the finance minister.
This article was written by David Blitzer, chairman of the index committee, S&P Dow Jones Indices.
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