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It’s all Greek: U.S. Investors are right to fear European default

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BOB MOON: Another d-word weighing on the markets is default. Moody’s has cut Greece’s credit rating again, putting chances for a default on its debt at 50-50.

Let’s discuss this with bankruptcy consultant Jim Millstein, who recently left the Treasury Department after helping unscramble AIG’s finances. Good morning.

JIM MILLSTEIN: Good morning.

MOON: Greece keeps denying it’s going to default on its debt, but what’s really going to determine that?

MILLSTEIN: Greece at this point is dependent on the kindness of strangers. Public markets are unwilling to finance them anymore and so they now depend on the kindness of the euro zone members to help meet or fix their budget gaps. And last year in May the European Union stepped in but those efforts have proved insufficient. They’re back at the well again and in order to get through the balance of this year and next year, they need more money. And so if Greece defaults on its debt, it’s really a crisis because European banks are heavily invested in the debt of the various sovereign nations.

MOON: How much do we have to worry about the dominoes falling?

MILLSTEIN: I think it’s a significant issue. You know it’s not as direct a hit for the American economy and the American banking system as the residential mortgage crisis was, but the truth in the matter is the banking systems internationally are very much integrated and intertwined and so our banks lend to German and French banks which lend to Greek banks which invest in Greek sovereign debt. So, if they catch a cold, we’re going to feel some of the consequences here in the United States.

MOON: You know the global recovery is looking fragile enough in the last few days. How bad would a default be for the economy?

MILLSTEIN: You know, look, economies are a function of the confidence people and participants in economies have about the future. If a major part of the banking system is threatened, it’s not good news for us.

MOON: Jim Millstein is a former bankruptcy lawyer and former Treasury Department official. Thanks for your insights.

MILLSTEIN: I appreciate the time.

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