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By Jeremy Glaser | 06-23-2011 12:42 PM

How Much Fallout From a Greek Default?

Morningstar analysts Erin Davis and Maclovio Pina discuss the inevitability of a Greek default and which banks are most exposed to Greek debt.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser.

The Greek sovereign debt crisis continues to roll on. I'm here with senior analysts Mac Pina and Erin Davis to take a look at the situation and see what it could mean for the European banks.

Thanks for joining me today.

Erin Davis: It's good to be here.

Glaser: So, Erin and Mac, can we just start off by giving an overview of exactly what's happening in Greece right now? Why is this crisis flaring up again? Can you just give us some background about the situation?

Davis: Well, George Papandreou just survived the vote of confidence, but very narrowly, and now the government is considering some austerity measures that are necessary for the next round of EU funds. There's been a lot of talk about people being opposed to them, but I think ultimately, they're going to pass.

Glaser: So, if we're able to get these austerity measures passed and able to bring the Greek budget deficit down a little bit, does that actually solve their fundamental structural problems? We hear a lot of about this as just kicking the can down the road. Could this really avoid a default of Greek debt? Is there a way to avoid this default?

Davis: Ultimately, I'm afraid that you're right, that this won't solve the problems in a really fundamental way. I think that they're just extending Greece's payout schedule, but the real underlying problem isn't a liquidity problem. It's not that Greece doesn't have enough money to pay the debt right now. The problem is that Greece is never going to be able to repay this debt.

So, ultimately, I think that the EU and the debtholders are going to become tired of extending the bonds, and that Greece is going to have to pay market rates eventually, and then, when that happens, it might be two or three years from now, but then, Greece is going to default.

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