Mass Defaults Are Highly Unlikely

I believe the mass default scenario in Europe that many are preparing for is a highly unlikely outcome. It is not in anybody's interest for there to be mass insolvencies in Europe and for the continent to slip into a depression.

Greece has been playing a game of chicken with the EU, thinking that the EU cannot let them go. While reforms have been passed, they have not been enforced. If Greece does not reform itself than there is no point to the bailouts. The EU is being left little choice but to let Greece go. At best Greece might get one more chance but I think the decision may have been made already.

Most of those who are opposed to bailing out Greece do not feel the same way about the rest of Europe. In the rest of Europe reforms are being made and commitments are being met. Even those opposed to bailing out Greece believe that the rest of Europe needs to be ring fenced in the case of a Greek default. German politicians who are opposed to the Greek bailouts have said so. Nobody is supporting a Lehman style bankruptcy where one day Greece goes under and nothing is put into place to stop the collateral damage. It is likely that those countries who accept bailouts will have to give up some of their sovereignity and submit their budgets to the EU for approval. But it seems like an easy choice.

I believe that Europe wants to vote the EFSF into place before they let Greece go so they have  a mechanism to stop the collateral damage. Its unlikely that there will be  a giant wave of mass insolvencies and depression. Nobody wants that. Markets over react and I believe they are placing a much larger chance of the disaster scenario occurring than is likely.

8 comments:

Anonymous said...

Brilliant- totally agree.  Greece may have over-played their hand.  They will be able to go back to Drachmas, which solves the rioting in the streets issue, as all million government employees will be paid in their own currency.  The rest of Europe will use Greece as the cheapest vacation spot, which will help the economy.  No worse than austerity, especially for Greeks that don't want to travel or buy any French or German products.

Tuesday links: jack of all trades | Abnormal Returns said...

[...] Discounting the “mass default” scenario in Europe.  (Capital Observer) [...]

Anonymous said...

I admire your optimism but keynsian policies never work, never have.  People argue "this time is different" every cycle.  But it always ends ugly.  That is when you have the bottom and a solution when things just can't get any worse.

Tsachy Mishal said...

Where do you see anything about stimulus? I am taking about letting Greece go. Europe is down 40% and 10% away from its 09 lows. Thats not ugly?

Anonymous said...

bond purchases are basically LBO'ing keynesianism.  i agree they should let greece go, but that sets precedence for other euro states inevitably leaving he union.  that may be the eventual solution is my point..

Anonymous said...

current europe index price is a pig with lipstick.  can get much uglier

Tsachy Mishal said...

Markets want instant gratification. They want Greece to be bailed out without any thought. Which would only set up a longer term unsustainable situation.

Anonymous said...

Indeed.  In fact, IF the EU survives this Greece issue, whether Greece is back on Drachmas or remains in the EU, the union will come out stronger on the other end; it will have been subject to the ultimate "stress test."

You are one of the only people I see doing actual thinking, analysis on this subject. The sell-side is a shrill chorus of negativity without thinking through the end game