2012, the Next Greek Crisis

According to The Economist, the bail-out for Greece has merely bought time, for about about three years. An eventual restructuring of Greek debt remains highly likely.

Excerpt:

“The bail-out, which was certainly bigger than the markets had expected, has all but eliminated the risk of default this year. But Greece still faces a deep medium-term solvency crisis. …

The rescue package has merely bought time—three years, in effect, to contain the adverse consequences of a possible Greek default. …

Even on optimistic assumptions, we reckon Greece will need €67 billion or more of long-term official loans in the next few years. Its debt burden will peak at 150% of GDP in 2014, a level exceeded now only by Japan. …

… the history of emerging-market debt crises, especially Argentina’s in 2001, suggests that, if default is overwhelmingly likely, it is better to get it over with rather than put it off with quixotic rescue packages. But this is not true in the Greek case, for two reasons that have less to do with Greece than with the rest of the euro area.

First, a Greek default now would carry a serious risk of triggering debt crises in Portugal, Spain and even Italy, the other euro-area countries suffering from some combination of big budget deficits, poor growth prospects and high debt burdens. The EU does not have the firepower to cope with these.

Second, a default now could also have calamitous effects on the fragile European banking system. Euro-area banks hold €120 billion of exposure to Greece, of which we reckon perhaps €70 billion is Greek sovereign debt. French and German banks account for 40% of the total. Many European banks might well require more government help if they lost a lot on Greek debt. Indeed, the sums involved might easily be greater than the German and French contributions to the Greek rescue loans. And if contagion then pushed Spain and Portugal to a crisis, the entire European banking system could implode."

Read the article here .