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The consequences of a possible Greek default

Stephen Beard Jun 16, 2011

The consequences of a possible Greek default

Stephen Beard Jun 16, 2011

Kai Ryssdal: Here’s an investing tip for those with a risk tolerance that’s on the high side — the very high side. You can buy a two-year Greek government bond today and get a 29 percent yield. Twenty-nine percent.

‘Course, that assumes the Greek economy’s going to be around in another two years to pay off. The political and economic convulsions over the country’s debt crisis continued again today. This is one of those stories that’s been around so long it’s tough to remember why it matters.

So we asked Marketplace’s Stephen Beard for a little ‘what if?’ A hypothetical ‘how bad could it really get anyway?’

Stephen Beard: Fear grips financial markets. Dealers spooked by their worst nightmare. Memories of the collapse of Lehman Brothers haunt the trading desks. Greece, Portugal, Ireland, Italy and Spain between them borrowed more than $3 trillion, much of it from European banks. If Greece defaults, maybe the others will too.

Peter Thal Larsen of Breaking Views.

Peter Thal Larsen: You have potentially a vicious spiral that affects the confidence in the banking system with defaults and losses spiraling one on top of the other. And that is really where the analogy is with Lehman.

By the middle of July — without another bailout — Greece will run out of cash. And that, says Tim Leunig of the London School of Economics, is when the European nightmare could begin to unfold.

Tim Leunig: Businesses find credit dries up. Consumers can’t get mortgages. It could be very painful indeed.

Beard: On a scale of one to 10, what are we talking about?

Leunig: Oh, at least 12.

And don’t think Americans will be able to enjoy watching this horror movie from a safe distance across the pond. In our globalized world, all the big banks are connected.

Economist Andrew Hilton.

Andrew Hilton: American banks will find their capital under pressure as well and they will have to cut back on their lending, so generally across the world, there will be a contraction of credit.

But there is a more benign scenario — a happier ending. And in the real world, says Tim Leunig, a fairy godmother will emerge and between now and the middle of July, bail out the Greeks again.

Leunig: Oh I’m sure that what will happen is that Europe will muddle through again. So the Germans, in particular, but also the French, will come up with another package for Greece.

But there is an unsettling thought: that maybe the Europeans will simply postpone the nightmare. An official at the IMF recently installed a jarring ringtone on his cellphone. It’s the sound of a can being kicked down the road.

In London, I’m Stephen Beard for Marketplace.

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