It’s the talk of the Forex town. Economic gurus the world over, including yours truly, have warned you about the inevitable: a Greek debt default. But I’m a man who believes that there are always two sides to every story. Here are three reasons why we won’t see Greece default on its debts… well, at least not yet!
Reason 1: Actual confirmation is needed that Greece will indeed need to restructure its debt
Unless officials see that there’s ABSOLUTELY no way for the Greeks to pay off their debt, restructuring won’t happen. I know, I know, it doesn’t seem to be the smartest and most practical thing to do. Heck! It’s like waiting for a man to drown before throwing him a life vest!
However, it is the right thing to do. Just like any average Joe filing for bankruptcy, the bank has to confirm that he is truly… well, bankrupt. As for Greece, the government just recently implemented its austerity program so we may need to wait a while to see if its financial system is without a doubt out of shape.
Reason 2: Germany’s banking system cannot handle a default
Landesbank, a group of state-owned Germany banks, owns a huge amount of sub-standard debt from other euro zone nations. And because Landesbank, as well as other major German banks use fair value accounting (pricing assets based on its current market value and not historical value), they are heavily exposed to bond price fluctuations. If risk aversion hits the market for example, risky debt securities could fall in value and hurt Germany’s balance sheets.
In January, Germany purchased about 11 billion EUR worth of Greek bonds. Unless German banks are willing to immediately recapitalize, a Greek restructuring or default will NOT happen. Germany, as you all probably know, has the largest economy in the entire euro zone.
Reason 3: Other euro zone nations could follow
Most importantly, we have to take into consideration what a Greek default would mean for other countries that are in the same boat. If Greece defaults, what will happen to its bailout buddies Portugal and Ireland?
Keep in mind that investors see these three countries in the same light: risky! As a matter of fact, Greece, Portugal, and Ireland have very similar bond yield curves. If you’ve read the School of Pipsology, you’d know that bond yield curves serve as a good gauge of how risky investors view investments in countries.
The problem lies in the reality that a Greek default would set a bad precedent for other debt-trouble countries. If Portugal and Ireland they see that the EU/IMF let Greece off the hook so easily, then they’ll want the same treatment as well. Now we can’t very well have all these countries defaulting on their debts one after the other, can we?