Is Wall Street Bracing for Greek Default?

Henry Truc  |

The International Monetary Fund today cut its global growth forecast for 2012 from 4 percent to a meager 3.3 percent, which would be down considerably from last year's 3.8 percent growth. As expected, much of the concern from the IMF stems from Europe's spiraling debt situation and the lack of firm direction from eurozone leaders to resolve the financial crisis. Greece, which has taken center stage as the epicenter of Europe's spiraling debt troubles, is already expected to default regardless of whether officials can agree on a new deal to reduce its debt load.

The IMF said it expects Europe's economies to enter a mild recession in 2012, driven by rising borrowing costs for sovereign debt and tightening credit on banks. In addition, aggressive austerity measures could actually backfire and derail any real recovery effort. The stalled growth won't just affect this year's output, but could easily spread into 2013.

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Greece's Default on the Horizon

EU finance ministers have been pressuring Greek leaders and private sectors to accept a new agreement to restructure the distressed state's debt situation. With a March deadline for €14.5 billion bond payment looming, Greece may need to take on additional cost-cutting measures and more assurances before additional aid will be provided. EU finance ministers have not been satisfied of the progress from Greece in implementing previously agreed upon austerity measures.

John Chambers, head of sovereign ratings for Standard & Poor's, told Bloomberg that "any deal between Greece and private sector investors would 'in all likelihood' qualify as a default." While Greece's debt rating is already low, Chambers does not expect another ratings cut for at least a few more months.

Financial Contagion

While investors may be bracing for the collapse of Greece's economy in the coming weeks, the fallout may spread to other European economies as well, causing a large-scale recession that could quickly turn global. Spain and Italy are already on the hot seat, and IMF managing director Christine Legarde has told leaders that they need to boost their bailout fund and possibly consider issuing EU bonds to encourage fiscal risk-sharing.

European ETFs have edged lower today, with the Vanguard European ETF (VGK) down 0.5 percent and the iShares MSCI Europe Financials (EUFN) down 0.78 percent.

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