When will Greece default? Many ask such question because it looks like a default in almost inevitable for Greece. Also how the market is going to react? That is the question most people in North American really care about.

The Greek’s fiscal problems emerged in 2009, and started receiving bailout from the Troika (EU, ECB, IMF) in 2010. Here is a list of facts about the bailout of Greece.

 

The European Economy

The fact that Greece is not the only one that has problems in the Euro zone gives less optimism of the single currency union being able to save Greece out of the trouble. Here is a overview of the euro zone and a list of the problematic countries and their sizes, and a description of the situation of the fiscal problems in that area.

 

 

When will Greece default?

Here is a series of news recently:

• When will Greece default? It looks like the consensus is that Greek debt problem is not sustainable, and a default is probably imminent. But it depends on a couple of factors
• Germany’s Chancellor Angela Merkel is losing the support of the German voters. The Free-Democrats Party, Merkel’s coalition partner scored just 1.8% in the Berlin election yesterday. Merkel has been one of the European leaders who gave positive comments and wants to keep the Euro intact. In order for the eurozone to stay united, it needs the support of Germany. It would be disappointing and create tremendous uncertainty if Merkel loses support in Germany.
• British former Prime Minister Gordon Brown fears a euro crisis comparable to 2008 to happen if countries like Greece cannot be saved.
• The Greek government held emergency meetings on Sunday, trying to solve the problems and get the next trench of aid passed in October
• Reported by Fabrizio Goria via twitter @FGoria RTRS: Greek finance minister official says Greece is close to a deal with the Troika

In fact, the downgrade of Greece debt to CCC in June already put Greece debt in a de facto default situation. But as we have said before, a Greece default is expected, but not in the immediate future. Greece do not seem to be able to meet the austerity measures and get back on track to payback the bailout loans by itself. It will rely on other European countries, whose help will again be conditional on the strength of other countries. We can tell the willingness to help by looking at the current vote and the expansion results of the EFSF. Although it is not designed to help Greece, it shows how much each country’s devotion is.

The bottom line

Even if Greece meets the obligations for the next trench of aid from the IMF and ECB, the difficulty Greece is having in meeting the requirements of the bailout funding seems onerous. There is a high probability that Greece will not meet the requirements for aid in the near future. At some point, Greece will have to default. That in itself isn’t the problem to the entire euro zone, because Greece is only 2% of the eurozone economy. The bigger problem is that attention will focus on the other troubled eurozone members. This uncertainty will affect confidence and surely cause a major drop in the euro and world stock markets.

Because the banks are highly exposed to country default, there will be liquidity crises which the ECB and the Fed have already assured the markets that they will act immediately. This will not save many of the banks from the losses they will endure on their balance sheets. This uncertainty will cause an immediate slow down in world industrial production. The severity will probably not be reminiscent of the 2008 liquidity crisis.