TUESDAY, FEBRUARY 7, 2012
Marshall Auerback: The Elephant in the Room is Spain, Not Italy
By Marshall Auerback, a portfolio strategist and hedge fund manager. Cross posted from New Economic Perspectives
Another day andthe markets remain fixated on whether Greece comes to a “voluntary” arrangement with its creditors. The key word is“voluntary” because the myth of “voluntary compliance has to be sustained so that those deadly credit default swaps avoid being triggered.
But let’s face it: Greece is a pimple. If the rest of the euro zone could cut itlose with a minimum of systemic risk, Athens would have long gone the way of Troy. The real issue is whether the credit default swaps trigger such a huge mess with the counterparties that it creates renewed systemic stress which more than offsets the benefits to the holders of the CDSs.
The more interesting question is: suppose Greece finally does get a deal? I realize everybody says it is a “one-off”, but do you really think the Irish, Portuguese, or even the Spanish and Italians will go along with that, particularly if (as is likely) they continue to experience double digit unemployment and minimal growth?
Now you could argue that Portugal and Ireland, like Greece, are but small components of the European Union and could well be covered in one form or another via the existing backstops established over the last several months, notably the European Financial Stability Fund (EFSF) and the European Stability Mechanism(ESM).
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