Assessing the Risk of a Greek Default
On Friday, April 24th, the finance ministers of Europe will again meet to discuss the fate of Greece’s bailout program. Although no definitive course of action is expected to come out of this meeting, it is yet another chance to assess the potential consequences if indeed the Greek government defaults on its loans.
Greek debt currently sits at 175% of GDP, and there has been a recent flight from Greek bonds. Short-term (3 year) bond yields are at nearly 29%, and standard 10-year bond yields are over 12.5%. Bond analysts are giving Greece a 90% of defaulting on its debt over the next five years, which is up from just 67% on March 1st.
See our Chart of the Week to see how things look for Greece’s debt, and who is on the hook if there is a default.
What happens if Greece defaults? Many expect that it would lead to an exit from the monetary union and that the country would have to return to their previous currency, the drachma.
In such a case, there would be substantial chaos as other European countries own €52.9B of bilateral debt, the European Financial Stability Fund (EFSF) is owed €141.8B in emergency loans, the ECB holds €27B of tradeable bonds, and €67.5B of bonds are held by private investors. It is likely a banking crisis would result, as the web of debt unravels between banks and countries throughout the globe.
Even if Greece doesn’t exit the Eurozone, it will be between a rock and a hard place. With an anti-austerity government in place, the inability to print its own currency, and skyrocketing yields on bonds and confidence, it will be difficult to find a way forward.
For a good overview of how this all started, don’t forget to view this video on the Eurozone Debt Crisis visualized.
Original graphic from: Gainesville Coins
