Then there’s the biggest unknown of them all: If Greece leaves or is forced out, who might be next? Probably Spain. Maybe Portugal or Italy.
Granted, a Spanish 10-year at 2.15% today is certainly sustainable, even for a country that has struggled to grow its economy. And we are a far cry from the crisis months of 2011, when Spain watched 10-year yields waffle between 6% and 7%. On the other hand, Spanish bond yields have risen from 1.15% to 2.15% in less than three months. If the U.S. economy would struggle with a 10-year above 3%, and it almost assuredly would, how much higher could yields in Spain climb before the euro-zone nation fell back into a recession or modern-day depression? How long before the Eurpean Central Bank (ECB) and International Monetary Fund (IMF) are negotiating with a new Spanish government?
An orderly Greek exit? Yes, that might be an inconvenience, even a net positive. A frantic scramble? Too-big-to-fail countries on the world scene like Spain and Italy could be next in line for calamitous consequences. Notice the similarity in year-to-date performance by GREK and by the iShares MSCI Spain ETF (EWP).
It is true that Greece is at least as likely to buy more time as it is to become the first nation to leave the euro currency. It’s also true that the initial anxiety of a “Grexit” could subside relatively quickly, as the unknown transitions to a known; a correction could serve up a buying opportunity. Yet those who bought the dot-com dips in 2000 and 2001 found themselves throwing good money after bad; those who followed the likes of bank cheerleader Dick Bove or superstar fund manager Bill Miller into buying “financials” in 2008 learned a harsh lesson about purchasing without a parachute. In sum, Greece is like a subprime mortgage that may or may not become contagious.