John Thomas Financial, an independent broker-dealer and investment banking firm located in New York City’s Financial District, today released Chief Analyst Mike Norman’s analysis and commentary on the economic crisis in Greece that has many wondering if the country will default on its debt.
In handicapping the Greek situation the most important fact that we have is that the government of Greece continues to abide by the conditions set forth by the European Union, ECB and IMF (the so-called, “Troika”). Therefore, as long as the Greek government agrees to further conditions of austerity and as long as the Greek people allow the current government to remain in power then the likelihood of default remains very low.
In addition, Germany is beginning to realize that there is no “cost” to the German people of continued ECB funding of Greece via bond purchases. Therefore, it is in the interest of the Germans to keep Greece from defaulting.
Indeed, a recent poll in Germany showed that 50% of the population was against a Greek default and German exporters understand that keeping Greece from defaulting amounts to quasi governmental protection of their export markets. In other words, they are not opposed to this.
Moreover, bond purchases by the ECB needn’t be inflationary because spending cuts under various austerity measures dampens demand and that keeps price pressures low. It also helps to keep the euro strong.
Admittedly, this is the “rational” course of action and there is no telling if the actors will act rationally.
Much harder to handicap is the possibility that the Greek government is brought down by mass strikes and demonstrations. A collapse in the government would likely mean a default was imminent, in which case there would be severe negative repercussions in global financial markets. Bank stocks would get hit particularly hard.
The magnitude and duration of any downturn would depend a lot on the official response to such an event. Banks wouldn’t necessarily have to be closed, but could remain functioning via provision of liquidity by central banks (principally, the ECB and the Federal Reserve) while policy makers decided whether or not to require the banks to raise additional capital.
In the U.S. the response would also depend on policy makers’ responses. If U.S. institutions were also forced to raise capital as a result of losses related to European exposure, that would have a negative impact on share prices, much the same as what we saw in 2008 and early 2009. However, the Fed has a far greater understanding of managing that situation than it did several years ago and the economy is still being supported by large amounts of deficit spending, which was not the case back in 2008. Hopefully, it would mean only a sharp, but brief, reaction.
At the moment I put the odds of a Greek default at about 20%, but again, that’s based on people acting rationally and we know how hard that is to predict.
About John Thomas Financial
John Thomas Financial, a member of FINRA and SIPC, is an independent broker-dealer and investment banking firm headquartered in New York City’s Wall Street district. Emphasizing a client-centric approach to managing all aspects of its business, John Thomas Financial and its affiliates offer a full complement of retail brokerage, private wealth management, and corporate advisory services tailored to the unique needs of its clients. The firm publishes the Fiscal Liquidity Index a unique daily indicator that looks at government spending and its impact on the financial markets, as well as The John Thomas Financial Economic Outlook, a research report analyzing consumer sentiment, market outlook, credit cycles and dozens of other market influences. For more information on the firm, please visit: www.johnthomasbd.com.