Contingency Plan Critical for Eventual Greek Default
Given the proper contingency plans, we don't think a default by Greece will cause a widespread financial meltdown.
While the sovereign debt crisis has been a concern for more than a year, the markets are becoming increasingly focused on the day-to-day headlines concerning Greece. The first Greek bailout was insufficient to tide the country over to the point that it can access the public markets, and now an additional bailout financing is being negotiated.
While it appears that the eurozone members and the European Central Bank will continue to support Greece in the short run, the country's eventual default will be a surprise to no one, as the bond market is already pricing in a likely default within the next two years. Greece's yield curve is inverted, the 5-year credit default swaps are trading well over +2000, and the 10-year bonds are trading around 54 cents on the dollar. The real test will be whether the ECB has developed contingency plans to mitigate any liquidity issues that may arise from the Greek default and stem any contagion before it starts.
James Leonard does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.