Greece's Role in the Economic Domino Theory

minyanville.com
I’m going to make a prediction: Greece will default unless they see a large portion of their debt forgiven outright. Shocking, right?

Here’s the simple story about Greece:

* They are very unfriendly towards business -- getting one started, keeping it open, the whole nine yards.

* The underground economy is massive (30%) because of the huge taxes they have there (VAT alone is 19+%) making it impossible to collect tax revenues accurately.

* Even if they could collect tax revenues accurately, they don't have the economic firepower to pull themselves out of their debt disaster, especially with an elevated euro.

* Fifty percent of GDP is government spending.

* Entitlements dwarf the current debt, making their situation all the more impossible.

I can hear the rebuttals now -- “But Greece is only 2% of the Eurozone economy.”

True, but let’s look at how that impacts the rest of the Eurozone.

1. Greece is a major importer of German goods.

2. Sixty percent of Greek debt issued in the last few years was bought by other European countries leading to massive mark downs if Greece defaults (mostly the French €73B, Swiss €59B, and Germans €39B; that is 3% of France’s GDP).

3. Fifty-one percent of Portuguese debt is owned by Spanish banks.

4. Thirty-two percent and 25% of Spanish debt is held by German and French banks respectively
(these numbers are from John Mauldin).

Can you say "economic domino theory"? Write-downs from losses in sovereign debt default will be a big negative for other countries, and investors will aim for Portugal and Spain (they already are if you look at Portugal’s CDSs) as the next stop for the default train.

Right now there are two prevailing scenarios:

1. Greece leaves the euro.

2. Germany leaves the euro. More...