Driving to the office this morning, I caught the end of an item on Radio 4 about the current financial crisis in Greece and the potential ramifications for the wider European and global economy.
One of the guests suggested that the European Central Bank was effectively insolvent, due to the liabilities arising in Greece, and that the collapse of the Euro was one possibility.
He pointed to the likelihood of a major default in Greece, with bond investors losing 50-70% of their investment next year.
A smaller ‘technical’ default is expected before then, as a result of government bond liabilities being restructured with a longer term for investors.
For the sake of balance, the other guest was confident that Greece would not be leaving the Euro, as there was no mechanism for this to happen.
The prospect of a major default in Greece is certainly weighing heavily on global financial markets at the moment.
As I type this, the FTSE 100 index is trading at 5,662.38, down a further 0.64% since it opened this morning. Asian stock markets fell overnight, with every expectation that Wall Street will open down this afternoon.
All eyes are now on Greece, as their Prime Minister attempts to push through new austerity measures following a reshuffle of his cabinet. These are necessary in order to qualify for additional financial support from the European Union and International Monetary Fund.
Germany and France are due to meet this morning to discuss how they can ensure Greece avoids default. They have a vested interest in seeing off a default, as their banks hold 55% of total European exposure to Greek debt.
Greek two-year bonds are currently yielding at 28.6%, which indicates just how risky the market believes they have become.
At the start of this year we predicted that the European sovereign debt crisis would be a recurring theme for investors during 2011. Events and the market reactions this week demonstrate that it remains a very serious issue.
Investors should be aware of the events in Greece and the potential consequences, although investing should always be for the long-term.
Photo credit: Flickr/endiaferon
