Greek Default: Germany Prepares, UK Fears Mount

Over the weekend, worries about a Greek default have intensified. Germany is getting ready for it, while China pledges to help, once again. Is it real? The implications of a default be far worse than expected, also in the UK. Updates on the news that could weigh heavily on the euro and the pound.

Germany

Germany is leading the effort to have a contribution of the private sector in the Greek bailout. It’s banks were the first to “volunteer”. But also Germany knows, that with or without rolling over bonds, the chances of a Greek default are rising.

The German finance minister, Wolfgang Schaeuble, is getting ready:

“We are doing everything we can to prevent a perilous escalation for Europe but must at the same time be prepared for the worst,” he told the Bild am Sonntag newspaper.

“If things turn out differently than everyone expects that would of course be a major breakdown. But even in 2008, the world was able to take coordinated action against a global and unpredictable financial market crisis,” he said.

The Greek parliament is meeting on Tuesday to discuss the austerity package. The procedures will continue on Wednesday. Apart from the usual protests, a general strike is expected during these two days. So there is a basis for the German fears.

Britain

While the British direct exposure to Greece is quite small, Britain’s financial sector has made this exposure bigger. How? Credit Default Swaps. Nobody knows the size of these deadly insurance policies. What’s certain, is that it’s big. We’ve seen AIG almost collapse when Lehman Brothers fell.

So now, the British government is pushing on British banks to join hands with the German initiative and to take losses before it’s forced upon them.

By the way, others doubt if this CDS is really worth anything.

It seems like a Greek default is a lose-lose situation for the British banks, no matter what side of the CDS they are on.

China

Chinese prime minister Wen  Jiabao is touring Europe. He is now in Britain and will arrive on Monday night to Germany.  Jiabao repeated the Chinese pledge to buy billions of euros of debt to help Europe. Is this real? In previous visits we’ve heard the same things. This was followed by dropping bond prices and a worsening of the crisis.

Will it be different this time? Does China understand that a Greek default will also hurt the Chinese economy? Or is  Jiabao thinking only about the short-term political advantage?

Further reading:

• Euro to dollar forecast
• British pound forecast