The risk of contagion in the Eurozone and indeed a global financial contagion remains real. Peripheral European bond markets are under pressure again today with 10 year bond yields in Ireland rising to over 12.1% and to over 11.65% in Portugal.
European leaders are preparing for a default by Greece. The German finance minister, Wolfgang Schaeuble, said yesterday that Europe is preparing "for the worst".
George Soros, Chairman of Soros Fund Management and famous for breaking the Bank of England in 1992, has warned that "we are on the verge of an economic collapse which starts, let's say, in Greece but it could easily spread."
The 80-year-old investor said that the “financial system remains extremely vulnerable."
Soros added that "there are fundamental flaws that need to be corrected." The core flaw, says Soros, is that the euro is not backed by a political union or joint treasury, so when something goes wrong with a participating country, there is "no provision for correction."
Soros said that it is "probably inevitable" that highly indebted countries will be given a way to quit the euro.
A further obstacle to the bailout has been reported today as German constitutional court in Karlsruhe is about to commence hearings on a lawsuit contesting the legality of the Greek bailout.
As Athens News reports, "the suit was filed last July by a group of five Eurosceptics led by economist Joachim Starbatty. According to the plaintiffs, the financial help package for Greece runs contrary to article 125 of the EU Treaty - the so-called no-bailout clause - which does not allow the EU or a member state to undertake the responsibility of covering the debts of another member state."
In the meanwhile Greek savers are bracing for the worst and draining banks' accounts.
Today, as part of its Weekly Credit Outlook, Moody's issued for the first time a very stark warning that should the rate of attrition in domestic deposits persist, or accelerate, the results would be disastrous.
Our discussions with rated Greek banks last week and public information lead us to estimate that private-sector customer deposit outflows in the banking system amount to around 8% since the beginning of 2011, which is a key credit negative for Greek banks. The potential for further deposit outflows constitutes a major liquidity risk for banks as depositor sentiment is affected by negative political developments and Greece’s capability for timely repayment of its debt obligations. We expect Greek banks to find it increasingly challenging to lower their dependence on ECB repo funding as deposit balances continue to decline.
Private-sector deposits have been declining since late 2009, while outflows in May and June accelerated, as shown in the exhibit below. Greece’s heated political tensions (government reshuffling and resistance to the new austerity package) and the uncertainties regarding the Troika’s (European Union, European Central Bank, and International Monetary Fund) commitment to continue funding support to Greece are driving deposits elsewhere.
And if push come to shovel and Greece should default the question would be how much and who is going to lose.
Some interesting articles today have been raising scary scenarios:
As Louise Story wrote in the NY Times,
“It’s the $616 billion question: Does the euro crisis have a hidden A.I.G.? No one seems to be sure, in large part because the world of derivatives is so murky. But the possibility that some company out there may have insured billions of dollars of European debt has added a new tension to the sovereign default debate... The looming uncertainties are whether these contracts — which insure against possibilities like a Greek default — are concentrated in the hands of a few companies, and if these companies will be able to pay out billions of dollars to cover losses during a default.” (Derivatives Cloud the Possible Fallout From a Greek Default)