Wednesday, June 1, 2011

Greece Debt is a Disaster, But for Who?

Martin Wolf appears on Yahoo Tech Ticker to describe his understanding of the debt problem of Greece and how it might impact investors and the government entities who have provided emergency bailout loans. One unknown is, who are the investors who get hurt. Wolf speculates that a debt crisis is less damaging when it is anticipated, like in the case of Greece. He feels that the debt holders are preparing now. Let's hope with him that the creditors to Greece are prepared for an inevitable writedown! He does not mention the potential contagion caused by credit default swaps being triggered and we learn again that they are useless in a default when one of the counter parties is unable to meet their obligation in the default of debt. Unfortunately, there is too little transparency in this market. The fact that the risk is not spoken about explicitly, and officials talk in couched terms about "massive contagion" and "incalculable consequences", should alert informed investors about the fragility of the resolution of the Greek debt. It may be a small contributor to world GDP, but it is now in position to be very influential to the stability of a financial system that has not recovered from the crisis it generated in 2008.