In last week’s weekly newsletter, I explained why Spain was in big trouble. Today I want to present the full context euro zone-wide and why there will be more sovereign defaults to come in the euro zone.
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At a minimum, I don’t think a breakup would happen straight away because we are in a crisis and a breakup now would also lead to a significant economic Depression. But once the situation is stabilised, thoughts will turn to these issues. If the situation spirals down due to the debt deflationary policy response, then yes we could see more than just Greece depart. But the Europeans will do their utmost to heap as much pain on Greece as they can to make that an unpalatable path.
Conclusion: So the crisis will continue and the potential for a ‘policy mistake’ will increase the longer it does. However, given the conflicting political considerations, Europe has few choices available. For now, it will dither through, reacting as necessary at each step of the crisis until the union breaks up or heals and moves to fiscal integration. Along the way, a re-default by Greece is likely, a Portuguese default will be inevitable, an Irish default possible, and a Spanish or Italian default unthinkable.