World is dangerously exposed to European default, report says

May 25, 2010 08:33


The total amount of debt issued by public and private sector institutions in Greece, Portugal and Spain that is held by financial institutions outside these three countries is roughly €2,000bn ( $2.5 TRILLION dollars ).  This is a staggeringly large figure, equivalent to about 22 per cent of the eurozone’s gross domestic product.  It is far higher than previous published estimates.  It indicates that, if a Greek or Portuguese or Spanish debt default were allowed to take place, the global financial system could suffer terrible damage. Putting it bluntly, Greece partied for too long and has almost certainly left it too late to deal with the hangover.

by Tony Barber at Financial Times

For anyone wondering why Europe’s leaders are so determined to avoid a restructuring of Greek sovereign debt, I recommend a remarkable piece of research published on Monday by Jacques Cailloux, the Royal Bank of Scotland’s chief European economist, and his colleagues. (Unfortunately, it seems not to be easily available on the internet, so I’m providing links to news stories that refer to the report.)

The RBS economists estimate that the total amount of debt issued by public and private sector institutions in Greece, Portugal and Spain that is held by financial institutions outside these three countries is roughly €2,000bn. This is a staggeringly large figure, equivalent to about 22 per cent of the eurozone’s gross domestic product. It is far higher than previous published estimates. It indicates that, if a Greek or Portuguese or Spanish debt default were allowed to take place, the global financial system could suffer terrible damage.

As the RBS analysts say, the problem isn’t – as some commentators have suggested – that Europe’s troubles would trigger an economic downturn or trade conflicts that would depress demand for US and other foreign goods. These are legitimate concerns but, relatively speaking, fairly trivial.

“Any assessment of the economic impact of a sovereign default of these economies through trade linkages or through their GDP size misses entirely the point,” the RBS report says. “It is the financial linkages that suggest that these economies are too intertwined with foreign financial institutions to default, a phenomenon largely reminiscent of that of subprime … in terms of the potential ramifications that a default would have across the global financial system.”

FULL STORY



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