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Anorak | Don’t Fear The Greek Default: It’s A False Alarm

Don’t Fear The Greek Default: It’s A False Alarm

by | 27th, October 2011

TO a large extent all this alarm about what’s going to happen when Greece defaults is just that: alarm. Alarm with no real basis in anything that’s really likely to happen.

There’s two things you need to know, over and above the usual background.

That usual background being that Greece owes around €350 billion and there’s no way it can pay it back. So, default it will have to be.

The two things? The first is that banks don’t just sit there and wait for the default. They do what is called “mark to market”, or at least are supposed to, and this means that when a loan or a bond is going sour they write down the value of that bond or loan. In effect, they take the loss they think they can see coming now, rather than waiting for that loss to actually arrive. We’ve seen in recent days that RBS has written their Greek debt down to 50% of face value and so too has Deutsche Bank. We’re pretty sure actually that all of the UK and most of the German banks have done this. We worry a bit that most of the French ones haven’t but that is Sarkozy’s problem, not ours.

So, pretty much, we think that the banks have already taken the losses of a Greek default, all we’re waiting for now is the confirmation of those losses. The banks won’t all go bust in short.

Then there’s the derivatives, those bits that worry people so. The ever popular CDS for example, a way of betting on someone going bust. What seems to be missed here is again two things.

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Posted: 27th, October 2011 | In: Money Comment (1) | Follow the Comments on our RSS feed: RSS 2.0 | TrackBack | Permalink