I think expectations that Greece would default over the weekend were unfounded - mainly because there are some crucial meetings that need to happen this coming week. The troika (ECB , EU and IMF) meet on wednesday so nothing will be clear before than in any case. Also the troika will more than likely cobble together some measures that allow them to kick the can further down the road. They have been doing this for a while now but every time they are forced to revisit the problem and confidence just seeps out of the system. I would not be surprised if talks now move towards how to have the most orderly default possible and reduce the effects of contagion from a Greek default as much as possible.
If you look at some of the market indicators - CDS spreads for Greece have reached an incredible 50,000 - at those kind of prices I am not sure anyone even bothers buying CDS protection any more. However the main point is that the market is pretty much putting a very high probability of default on Greece (around 95%). The next indicator that is cause for worry is the rate at which GDP is shrinking - its down 7.3% in the last quarter (annualised). With GDP growth probably due to get worse as the cuts get more and more savage with austerity measures I dont see how Greece will actually be able to meet the ambitious debt cutting plans they have agreed to. The spectre of total social breakdown and anarchy also looms large. Its a very difficult balancing act - clearly Greece needs some structural reforms, but they can't have society just breakdown in order to achieve it.
Leaving aside the question of when (it is no longer a question of if) Greece defaults - lets ask another question - who else will be affected by Greece defaulting? Clearly a major casualty will be the EU as a whole - a Greek default will affect the credibility and standing of the EU and their economic policies. More worryingly we will most likely see the credit markets start to seize up with regards to some of the EU nations. The ones most at risk inferring from the CDS market are Portugal, Ireland , Italy and Spain (in that order). Think the immediate effects of a Greek default will be that there will be a liquidity crunch across sovereigns as well as the interbank market. We will probably return to the dark days of the credit crunch where banks fell overnight due to not having the ability to raise short term liquidity to fund their ongoing activities as fear pretty much stops the interbank market and LIBOR / EURIBOR spreads start to shoot up again.
So who is really exposed to the Greek debt (of course I mean foreign investors as there is significant domestic exposure within Greece)? The Chart below shows the countries in the EU that are exposed to Greek debt. (I have used data from the Guardian newspaper to put together these charts).
Looks like Germany and France pretty much account for half the exposure, which is pretty common knowledge. To me Holland and Belgium seem like the two segments that seem pretty large and may cause some trouble. There is already talk of some of the French banks getting downgraded owing to their exposure to Greece so expect the interbank markets to be choppy for a while.
Below is a list of the top 12 banks with large exposures to Greece (as a percentage of their equity):
Bank of Cyprus is clearly in trouble, and Dexia looks like it has far too much exposure as well. The market seems pretty jittery about Dexia's prospects as it was down 7% on friday. I think a Greek default is going to be pretty damaging to the European banking system as a whole and over the weekend EU leaders would have been talking about how to shore up the capital base of some of the banks worst affected by this.
The EU has to make the right moves now so that all confidence is not lost in the system. However already its starting to look like this situation might be beyond anybody's control and whatever is done will be too little too late. I get the strong feeling that we are merely prolonging the inevitable.
