Greek Default to Start Huge Credit Crunch?

Greek Default to Start Huge Credit Crunch?

There’s a rumor in the market about Greece “restructuring” its debt over the weekend. The Euro currently shrugs it off. But an unprecedented default in one of the Euro-zone countries is could have huge implications. Will this start a bigger snow ball than the Greek bailout? The whole European banking system is endangered and the people could take to the streets.

The markets

Here’s one source reporting the default rumor, This follows record high CDS spreads (close to 1300 points) and sky piercing yields for Greece. Portugal isn’t too far behind in terms of yields, with 9.25% on ten year bonds.

EUR/USD is stable around the 1.4520 line. It fell on such worries earlier in the week, but managed to make an impressive recovery. This rumor doesn’t seem to move the common currency at the moment. But a move over the weekend could send the Euro down on Monday and especially on Tuesday, as everybody gets back from the holiday.

A restructuring for Greek debt over the Easter weekend has roots in the recent comments by German officials and by reports in Greek newspapers that a restructuring or default is underway. The German officials usually backed off after hinting a default, but the markets and the Greek media isn’t impressed.

Talks about a default for Greece began early in the year, and even earlier – some speculated that the bailout of May 2010 wouldn’t help, and that creditors would eventually need to undergo haircuts.

A precedent

A default by a member of the Euro-zone is unprecedented. The goal of the bailouts was to avoid defaults. In Ireland, the Germans, French and British pushed the country to a bailout in order to save the German, French and British banks from suffering losses due to their exposure to Irish debt.

This could start a snowball of defaults – Ireland and Portugal may be next. Portugal just made an official request for a bailout in order to pay its debt. But this faces opposition from the new Finnish government and from the junior coalition party in Germany, FDP.

The Finns and also the Germans are fed up with paying to bail out banks and governments in other countries in order to help their own banks.

That’s what the people of Iceland did – let the banks fall. Two referendums couldn’t convince the people to pay for the banks. After an initial plunge at the height of the financial crisis, Iceland is now better off.

They want the banks to pay for their mess, not taxpayers.

But no one knows how this will end – the banks could roll over the debt back to the citizens. We’re up for a big mess in Europe, much bigger than we’ve seen in the past year. Perhaps it’s not only an Arab spring we’re witnessing, but also a European spring

If citizens won’t be able to withdraw cash from the banks, they will be unhappy, to say the least. Another credit crunch, three years after the previous one, finds much weaker economies and very disgruntled citizens.

Having bad years after a few good ones? OK, the public can handle that. But to pay once again for the banks’ and the governments’ wrongdoings? Not so fast. Riots could flood the continent.

Riots have been already seen in Greece during the current crisis. London has witnessed large demonstrations. A credit crunch means that economic activity will come to a standstill. The crisis of October 2011, of a  much higher magnitude.

The dark picture I’m painting here may be too far out. But it could be yet another “black swan” as well.

For technical analysis and further events, see the EUR/USD forecast.

Yohay Elam

Yohay Elam

Yohay Elam: Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I've accumulated. After taking a short course about forex. Like many forex traders, I've earned a significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I've worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.