Greek Domino Effect – Does Italy Guarantee Greece Bonds?

There’s a Mises.org article circulating now about how the recent Greek elections could end up shattering the Eurozone. This really is uncharted territory because nothing like the Eurozone has existed before, with separate sovereign states sharing a fiat currency controlled by a central bank.

The article is titled “How Greek Default May Still Unravel the EU“. Despite a few strange contradictions between the beginning and the end of the article, what I found most interesting was this part:

Greece currently owes a little over 300 billion euros to various creditors. About 200 billion is owed to the Eurozone institutions, the European Financial Stability Facility (EFSF), and the European Stability Mechanism (ESM), that raised funds based on Eurozone guarantees…Spain, Italy, and France have guaranteed about 50 percent of this debt. A default would mean an important increase in the debt load of each of these countries. This would likely be the tipping point for Italy which has a current debt to GDP level of over 130 percent and several decades of essentially no growth. Italy is too big to bail out.

I did some cursory Googling of anything about Italy guaranteeing any portion of Greek debt. I couldn’t find anything, but I didn’t really put much effort into the research. There are no footnotes to the article, so I see no source for this, though that doesn’t mean it isn’t true.

Let’s assume it is though. Tsipras and Varoufakis together are a pretty formidable force for getting out of the current debt stranglehold. Varoufakis wants to default and hates politicians. Tsipras wants to maintain his fiery appeal and may just be crazy enough (in a good way) to listen to Varoufakis, who is probably the only honorable person in the entire Hellenic Parliament to have any grasp of economics at all.

If Tsipras can’t get a good deal enough to appease his voters – and nothing will appease them because their expectations are ridiculous – then Varoufakis will egg him on to default within the Euro. Now, whether this actually increases Italy’s debt burden due to guarantees through the ESM and EFSF seems rather unimportant, because if Greece defaults, I’m willing to bet that Italian bonds are going to plummet the next day with Italian interest rates skyrocketing. That will be enough to push Italy overboard.

If Greece defaults at 175% debt to GDP with bond investors losing everything, Italy is not far behind at 133%. Nobody is going to want Italian bonds in the event of a bona fide Greek default. If Italy goes down, then so do the rest of the PIIGS – leaving Portugal, Ireland, and Spain. What happens then is really up in the air. Nobody knows.

But yes, a Greek default will fundamentally alter the Eurozone if not destroy it.

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6 thoughts on “Greek Domino Effect – Does Italy Guarantee Greece Bonds?

  1. Here http://www.theguardian.com/business/2015/jan/21/eurozone-exit-greek-grexit-germany-france
    it says that the governments built a buffer for the past 4 years in case Greece exits eurozone. Most affected will still be French and German banks.
    “The Ifo Munich-based thinktank has chalked up losses to Germany of at least €77bn. President Hans-Werner Sinn, known for backing German business interests, said it was folly to be blackmailed by Tsipras and that it would be better to let Greece depart. He said the losses from a Grexit would be less than continued membership with endless loans and debt forgiveness, though his preference was for a debt conference that found a way to delay payments.” [Trying to picture the scene where Tsipras blackmails Sinn]. It’s possible they may want to convince Greece to leave the eurozone and take the blow because they don’t like this “type of behavior.”

  2. I tried to research this on European sites, notably French ones. I there found an old news from 2012 that says the Greek government can’t make decisions regarding the new bonds. They are under the laws and tribunals of UK.
    This may be old news you already know, but does this not mean that Tsipras and Varoufakis simply can’t take any decision for their own country’s economy?
    I can give you the link but it’s in French, maybe google translate will work.

  3. Rafi, Mish has written about the mutual guarantees of national defaults. It’s definitely the case. Greece is responsible for some its defaulted debt!

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