Greece Downgrade: What Shoes Will Drop Next?

The Financial Times indicator is looking more and more reliable: when the pink paper starts playing at the top of its form, the wheels are about to come off.

The most troubling aspect of the Standard & Poors downgrade of Greece to junk and Portugal’s downgrade came in its release. It isn’t just that Greece looks increasingly likely to default. As we have said, it seems like a certainty; the fiscal cuts required by its austerity program are arguably the deepest in modern times.

The real problem is that the losses on default are likely to be far steeper than is typical for sovereign borrowers. From S&P’s press release:

The outlook is negative. At the same time, we assigned a recovery rating of ‘4′ to Greece’s debt issues, indicating our expectation of “average” (30%-50%) recovery for debtholders in the event of a debt restructuring or payment default”

Yves here. Those who called Greece a subprime borrower were more correct than they knew. One of the factors that made subprime losses so devastating has been the high loss severities.

The real risk here is to Eurobanks. They ran with even higher leverage ratios than US banks, they are believed to have recognized less of the losses thus far on their books than their US peers. Even worse, readers report that the major dealers (and the Eurobanks were part of this cohort) are carrying toxic assets at prices that are vastly above likely long-term value. Eurobank exposure to Greece is over $190 billion, and total periphery country exposure is roughly $900 billion.

http://www.nakedcapitalism.com/2010/04/greece-downgrade-what-shoes-will-drop-next.html

It's nowhere near enough to cause massive economic collapse long term - anywhere but Greece of course.

Or something else?

There's a pretty good post on the subject at SuddenDebt.com.

The whole thing is eerie. Didn't Austria go through this prior to WWII? I don't think that turned out well for anyone. Maybe that's why there is so much panic?

My point was that even if creditors get zero return (unthinkable for an EU country debtor) it would not cause massive global problems. What I think they should, and will after some complaining, do is restructure their debt, comply with conditions for a partial Euro-zone bailout including reducing spending and raising rvenue, and have the IMF on speed dial.

Who is next?

Portugal, Spain, Ireland. They are showin signs of trouble.

The real problem is the domino effect. If Greece goes, what happens next? Will the Euro survive? If the Euro fails, the European economy is in big trouble. And the rest of the world will be draged down with it.