Bankers are bracing for a Greek default, and their best hope is that Europe can erect firewalls around the banking system strong enough and soon enough to prevent it from spreading to other euro-zone countries.
So gloomy were bankers from major financial institutions, attending a conference on the sidelines of the International Monetary Fund/World Bank sessions, that they compared the risks of financial market contagion to the collapse of Lehman Brothers.The direct financial exposure in the European banking system is extremely manageable. What’s the indirect impact? You’re going to have one massive demand shock.
The fact is we should all expect some sort of a GDP impact if you have a demand shock that’s going to be that significant and that’s going to have an impact on business.The biggest fear is that Greece defaulting on its 340 billion euros in government debt would trigger widespread selling of euro-zone debt causing a much broader financial crisis.
This (Greek default) is what we have to prepare for. I don’t think it is the most likely scenario, but we have to be prepared.Also I Think That isolated Greek insolvency would be manageable, even though they would have to take writedowns larger than the current 21 percent they have made provisions for. But if a wave of bankruptcies sweeps through Europe, the situation looks different; many banks would get into trouble — and not just in Europe.
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Privately, bankers say they could face 60-80 percent bond losses on a Greek default. Faced with that, they said they would be willing to renegotiate a “better deal” than the 21 percent loss they have agreed to absorb as part of a July Greek bond swap deal, if it lowers the risk of Greek insolvency.