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Game of Chicken
How Likely Is Greece’s Default?

While Greek Prime Minister Alexis Tsipras was trading barbs with his European counterparts, the Greek Central Bank issued a report urging him to put politics aside and negotiate a deal that, by the central bank’s lights, was very much within reach. The Wall Street Journal:

“Failure to reach an agreement would… mark the beginning of a painful course that would lead initially to a Greek default and ultimately to the country’s exit from the euro area and—most likely—from the European Union,” the report said.

“A manageable debt crisis, as the one that we are currently addressing with the help of our partners, would snowball into an uncontrollable crisis, with great risks for the banking system and financial stability.”

All this would imply deep recession, a dramatic decline in income levels, an exponential rise in unemployment and a collapse of all that the Greek economy has achieved over the years of its EU, and especially its euro area, membership, the report added.

But how likely is the default, really? The Financial Times looked at the historical numbers, talked to some analysts, and found that “the market verdict on Greece’s interminable debt negotiations is unequivocal: there will be no default.” Experts told the FT that as long as prices on short-term Greek debt stay above 50 cents on the euro, default and ejection from the eurozone is not being priced in by the markets. And lo and behold, two- and five-year Greek bonds are trading in the low-60 cents to the euro at time of writing. In comparison, “Ukraine’s short-dated bonds are marked around 50 cents in the dollar, which indicates a higher degree of investor concern in the short term,” the head of sovereign debt at Citi told the FT.

One suspects the Greeks themselves are looking at these numbers to bolster their own confidence in the standoff. Unfortunately for Athens, however, there are several caveats. For one, all this concerns only privately-held debt, which only makes up 18% of the total outstanding according to S&P. Investors may be betting that in the case of restructuring they’ll get by relatively unharmed. For another, markets can turn on a dime in a crisis as new information comes to light.

And that’s why this is such a dangerous game: no one knows who will break, and who has more to lose if and when things go south. As long as both sides think they’ve got the stronger position, however, things look to be headed nowhere good.

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  • Anthony

    “Will the discontented peoples of Europe be willing for a generation to come so to order their lives that an appreciable part of their daily produce may be available to meet a foreign payment” – a general sentiment that may attach to thrust of post – (John Maynard Keynes: Economic Consequence of the Peace).

  • Larry Seltzer

    “…as long as prices on short-term Greek debt stay above 50 cents on the euro…”
    “cents”? Is that how one refers to fractions of a Euro?

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