A few of you have asked what I make of the pending Greek default. I would prefer to call it the “Greek resolution,” since I am not sure it matters much whether there is a formal legal default. You hear some “CDS settlements will go crazy” stories but right now they are just that, stories. And there may yet be an agreement for Greece, although no agreement will stop their money supply from shrinking sixteen percent a year (or more). In any case, I see two significant events on the way:
1. Other countries will start asking more vocally why they are not getting some form of the Greek deal. Ireland in particular is picking up all of its bank debt, or what if Monti wants some real debt relief, asked for quietly but firmly under the table? Since he is making serious efforts to deliver on responsible policy reform, and he is quite credible internationally and with investors, this in some ways makes him a more dangerous player in the game. (Such a rebalancing of power in the bargaining game is a neglected aspect of putting in those technocrats.) These scenarios start looking ugly quickly.
2. After Greece the market will likely focus on Portugal. It is one thing to say “Greece is an exception,” much tougher to hold the general Eurozone line with “Greece and Portugal, they are the exceptions.”
It boils down to what kind of focality the Greek resolution will have. Since theories of focality are not very precise or predictable, this is a tough one to call. I’ll stick with my longer-run view that the Eurocrisis can be solved if a) the 17 countries act in a roughly unified way, and b) Italy shows reasonable prospects of growing at about two percent a year or more.
In other words, I’m still a pessimist.