Capital Ideas Blog


By Robin Mordfin

From: Blog

Although Greece only represents 2% of the euro zone economy, in October 2010 experts were seriously concerned that an uncontrolled Greek debt default would cause contagion risk for other nations and for the world economy at large. Since then, billions of euros have been poured into the Greek economy and the threat has lessened. In fact, in the past month both Portugal and Greece produced oversubscribed debt issues

With this good news in mind, the experts of the IGM Forum were recently asked whether they agree that it is unlikely that any euro area countries will default in the foreseeable future. And while we would all like to relax and not worry about the future of the global economy, the experts cannot all agree that we should. 

Half of the panelists do agree that such a default is unlikely. However, they still advised caution with their agree votes. Pete Klenow of Stanford said, "Sovereign bond yields and credit default spreads imply that default is a nontrivial possibility, but the more likely outcome is no default." Similarly, Larry Samuelson of Yale said, "Default looks less likely, but structural problems in the euro zone remain, and much has yet to transpire before default is truly unlikely." 

A healthy fifth of the panel is uncertain about the possibility of default and had little to say about it, clearly indicating that their uncertainty arose for obvious reasons. William Nordhaus of Yale was the only uncertain voter who left a note, in which he wrote that the possibility of default "is reduced from 2 to 3 years ago, but [it is] still a fragile system." 

Nearly a quarter of the panelists disagree with the notion that default is unlikely, and made their views clear with their votes. Abhijit Banerjee of MIT observed that, "These are small countries. It is not too likely, but it is not impossible, that a bigger country will hit some political shocks. Then all bets are off." Markus Brunnermeier of Princeton agreed with Banerjee, and wrote, "Uncertainties in emerging markets helped European bond issuances. [But] many unforeseen events can easily worsen the current situation."

So where do all of these opinions leave the average investor? Perhaps a bit more optimistic, but still cautious. Although half of the panel thinks a default is unlikely, not a single one was completely optimistic, which means we regular folks should think long and hard before we decide where to put our nest eggs.


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