What a Greek default could look like
Steve Chiotakis: Today, German, French and Greek
leaders are holding urgent talks about fears Greece could default on its debts. Later in the week, U.S. Treasury Secretary Tim Geithner will travel to Poland to attend a meeting of European finance ministers — that’s something an American rarely does. But why all the concern over Greece, whose economy is just a small percentage of Europe’s entire economy?
Marketplace’s Stephen Beard reports.
Stephen Beard: No one knows for sure. But here’s one possible scenario: Greece reneges on half its debt. French banks, having lent most heavily to the Greeks, suffer heavy losses. That on its own would not cause a global crisis.
But, says Stephen Lewis, of Monument Securities, the problem could then spread to other countries in the eurozone.
Stephen Lewis: Other governments which are laboring under a heavy debt burden might feel it unfair that they should continue servicing their debt when Greece was being relieved of its liability.
Portugal, Ireland, even Spain and Italy might restructure too. Many other European banks would then take a hit, and cut their lending.
The result, says Tim Leunig of the London School of Economics: recession.
Tim Leunig: Certainly in Europe with knock-on effect to the rest of the world, which given that the U.S. is spluttering at the moment would be problematic in the United States.
Of course, it may never happen. The effects of a Greek default may be contained within Greece. But there is a clear danger that Europe may be on the brink of a Lehman-style disaster.
In London I’m Stephen Beard for Marketplace.
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