There is no Atlantic Wall of Financial Protection

Takeaway

  • European ratings agencies could still deem Greece to be in default, despite recent financial maneuverings by EU governments
  • U.S institutions are exposed less from direct holdings of Euro debt than from insurance exposure via the CDS market

Lately we’ve been seeing some fancy footwork and relieved smiles from both European and American leaders. The reason is not that the Euro debt crisis has been resolved, but they believe they have found a formula to contain the problem. The containment plan involves a Greek debt swap to lesser valued debt which, through some arm twisting, will not be characterized as a default. It also involves some serious cover-ups of the value of bank assets. But depositors still have the final word as they move deposits away from banks holding questionable assets and, in so doing, they will determine the flight to quality asset — which is not likely to be the U.S. dollar this time around, as the Atlantic Wall of Financial Protection is on the verge of being compromised.

On his blog, The Spellman Report, McCombs School of Business Professor Lew Spellman discusses more about why the U.S. is not immune from the potential fallout of the European debt crisis.