The talk in the trading and investment community of the possibility of a Greek default seems to be intensifying.
Greek ten year bonds are now pricing in a ninety nine percent probability of the country defaulting on its debt obligations. Even though Greece represents only two point six percent of Eurozone GDP, the consequences for wider European markets and the social fallout for the man on the street could be extremely serious.
At The Trader Meeting this fortnight, the traders seemed to be readying themselves for the knock on effects and wider consequences of a Greek default. In response to Keith McIntosh’s continual concern that European markets could crater into year end, former Goldman Sachs trader Anton Kreil, outlined what he thinks could be the most likely outcome on the day a Greek default is announced.
The prediction seems to be that on the day a Greek default is announced, it will also be announced simultaneously that Greece will leave the Euro and Greece’s pre Euro currency, the Drachma, will start trading on the international FOREX markets almost immediately. If this is the case, the traders believe the Drachma will have to be competitively devalued immediately by forty to fifty percent, meaning that Greek middle classes will see their savings held in domestic banks depreciate by the same amount in value within twenty four hours. This could then precipitate a “run” on the banks causing the Greek economy to collapse even further.
The traders at The Trader Meeting seem extremely concerned that the fallout in Greece could lead to more social fallout in Portugal, Spain and Italy. On the day of a Greek default, Spanish and Italian 10 year bond yields could rally above the psychological six percent level again, heading to the crucial seven percent level, at which the bond markets believe Eurozone intervention would be tested. The traders seem to think that any social fallout in Greece could cause Portuguese, Spanish and Italian middle class savers to make a “run” on their own domestic banks.
Kreil states “I’m not sure this time we will be seeing orderly queues outside the banks like we did in the U.K. with Northern Rock.”
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