Why Greece Matters

There is some action in the Blogsphere today and in the Main Stream Media (MSM) about Greece not mattering. One of the Guys over at Business Spectator is saying Greece is irrelevant because it equates to only 0.5% of the global economy. Even Michael Pascoe over at BusinessDay has joined the fray arguing that the market is a little hysterical about what’s going on. He makes plenty of points but he says on this topic,

Greece itself remains an insignificant, hopelessly corrupt and inefficient economy that shows no sign of changing any time soon.

I find this and the tone of the argument he puts forward a bit rude let alone spurious because I think his approach and those of others who discount the potential impact of a Greek, Irish and or Portuguese default as only adding up to Florida and therefore irrelevant miss the point of the interconnectedness of markets.

I posted a comment on Pascoe’s piece and ‘ll repeat part here,

If it was an easy fix and was immaterial as you suggest the Europeans would have fixed it.

Don’t you think they would have? I do – the fact that they haven’t and can’t speaks of deeper divisions and structural problems within the Euro Zone which will take some heavy lifting to fix. All the while we slide closer toward a Greek default and exit from the Euro. I bet the Irish are watching closely.

BUT THE KEY REASON TO BE CONCERNED IS SUMMARISED BY THE FOLLOWING CHART from today’s release by the RBA of a discussion paper titled “Central Clearing of OTC Derivatives in Australia – A discussion paper issued by the Council of Financial Regulators”.

The point why Greece matters is the top part of the graph and the point I made in this morning’s piece about the writing of CDS and where the risk of default lies. It is the bilateral nature of OTC Derivatives that puts the system at risk. If/once Greece defaults no one knows who else is holding toxic positions on their balance sheets so global finance could seize up again (as it did after Lehman and Iceland) and if Ireland or other go down this route then watch out.

Remember that in the early days of the crisis when Governments guaranteed their banks and hardly anyone was questioning the sustainability of Sovereigns lots of CDS would have been written for 5 years or so. these positions are still out there somewhere as are other, more recent ones.

Greece may be a small country with structural economic problems but it is punching above its weight as a potential catalyst for a market dislocation. Circumspection remains the key investment theme.

greg@lighthousesecurities.com.au

www.twitter.com/gregorymckenna

This blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.

If you do need economic, investment or financial adviser we are happy to help and if you are an adviser and would like to join our network we are also happy to help.

Please Email the team at Lighthouse at info@lighthousesecurities.com.au or Greg directly on greg@lighthousesecurities.com.au

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