Step one will be an agreement will be forged between banks, perhaps including an assortment of central banks, and Greek politicians. The only sticking point will be the portion of the debt that has been purchased by hedge funds, then insured by purchasing credit default swaps. The hedge funds will make the most money ifGreeceis forced into bankruptcy; their second best scenario is forGreeceto be able to roll-over the sovereign debt at 50¢ on the Euro. The first situation does not square with the political aspirations of the Eurozone; the second simply forceGreeceto repeat the bailout in a matter of months – 12 months at most. Will the Eurozone politicians have the stomach forGreeceto renounce the debt acquired by the hedge funds? That, along with writing down the debt to 30¢ on the Euro, would go a long way towards making possible Greek economic recovery.
Getting through step one requires the Greek government to make cuts that are well beyond what the electorate will tolerate. The downstream net result, step two, will be that Greek government will be forced to abandon some of the promises and cuts. The Eurozone will most likely tolerate that failure, as it has been doing for years.
Step three will be to return to step one. Eventually, even Greek politicians will figure out that Greece needs both jobs and a workforce that will actually work at those jobs.
But in the meantime, the very, very important outcome will be what doesn’t happen: panic. No disorderly default will mean no panic in the equities markets and no discovery that, once again, the banks and insurance companies have written so many CDSs that they are illiquid or worse. Steps one and two will buy time for the world’s economy to strengthen (absent some other grand and greedy stupidity by the banks and/or hedge funds).
All that means a gradual return of solidity to housing prices in the coastal cities of the US; it means Canada will have a not-very-severe loss of confidence in its housing market; housing prices in England,FranceandGermanywill solidify.SpainandPortugalwill continue to have high default rates, in large part because they are economically mired in the 1930s. On the other hand,China,Brazil and India will continue to prosper, though their outrageously high growth rates (echoes of “Irrational Exuberance”) will move down towards long term stable rates.
The worlds bourses/stock markets will continue to have the ups and downs that are normal; the general trend or, as economists like to call it, “drift” will remain up for the major economies.
Expect slow growth outside of China,BrazilandIndia. But slow growth is better than no growth, and much, much better than contraction.
But if step one blows up – Oh, my! Anything could happen, and the prospects for anything good are very slender.
