Dominos and Default
A default was the proximate risk for Greece, where politics makes fiscal austerity a challenge (Greece has failed to deliver on EU budget targets for many years), and where technical default through inflationary money printing isn’t an option due to euro membership. In terms of near term default risks, the domino theory has historical precedent. After all, defaults tend to cluster, as was seen in both Latin America in the early 1980s and Eastern Europe in the 1990s. And while Greece is a tiny economy, Thailand isn’t exactly huge, and its Baht plunge marked the start of a larger Asian crisis in the late 1990s.
The threat of contagion in Europe though is still low, both due to political considerations on the part of the EU as a whole, and the wide fiscal performance gap between Greece and some of the other so called “PIIGS” economies (Chart 4). While Greece could plausibly reach for the default parachute if domestic politics prevents the implementation of deep spending cuts or tax hikes (as
well as increased enforcement), that isn’t yet a serious risk elsewhere in the eurozone. Across the channel, or across the Atlantic, deficits aren’t far from Greek levels in both the US and the UK. But debt-to-GDP levels are still below where Canada’s stood in the 1990s, and the debt is owed in domestic currency. There are cases of domestic currency debt restructurings that amounted to
technical defaults, most recently in Jamaica. But that’s not a realistic scenario for major economies over the next few years.
Deny-Default-or-Deleverage-
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