The Greece debt drama continues. Its leftist government once again refused to meet the creditors’ demand to abide by the terms of the aid on Sunday – the talks collapsed after 45 minutes. This was a decisive step towards a default. The next (and likely, last) chance for Greece to avoid default will be at the Eurogroup meeting of finance ministers on Thursday, June 18th – although it appears that Greece will be handed an ultimatum deal at that meeting.
As I have blogged previously, while Greek default should have been widely expected (and is now, after last weekend), is effectively an economic suicide. Locked out of debt markets and without further aid, Greece would run out of money for public expenses, creating a shock to its already-weak economy. The run on the banks would worsen, requiring capital controls and a swift currency swap/devaluation. Such developments are typically accompanied by severe drop in economic output and by wealth destruction.
Emerging markets (IEMG, -7.1% in one month as of 6/15/2015) and European equities (IVE, -4.2%) have already reacted to this rising concern. A default might, of course, trigger a further short-term selloff, especially in European markets. However, the Eurozone is much better prepared for this event than it was in 2011, both based on economic fundamentals and in market structure, with the ECB ready to act in case of contagion.
Chart source: Ycharts.com
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