According to an report from bloomberg last week, the record high Credit-default swaps on Greek government debt is “signaling a 91% chance the nation will fail to meet debt commitments”. So Why did the situation become worse and worse.
The article “What an impeccable disaster” in today’s Straits Times describe the event vividly:
Investors, for whatever reason, fear that a country (Greece) will default on its debt. This makes them unwilling to buy the country’s bonds, or at least not unless offered a very high interest rate. And the fact that the country must roll its debt over at high interest rates worsens its fiscal prospects, making default more likely, so that the crisis of confidence becomes a self- fulfilling prophecy. And as it does, it becomes a banking crisis as well, since a country’s banks are normally heavily invested in government debt.
We have already seen European banks are under tremendous pressure now. What worries the markets is that nobody knows exactly the real impact of a Greece default. It does not mean you are safe if you are not a Greece bond holder. When it becomes a banking crisis, it affects everybody.
If you recall the collapse of Lehman Brothers, it was never a trouble until it troubled you.