Contagion Predicting for Euro

Well the election is over in Greece and the New democracy party gained and possible that they will need support from Syriza to form the government. The question still remain in my mind. Can the Greece leave he euro quietly ? well possible but a lot of arguments has already been put in to  posts and the economists, financial baron have discussed.

When I say possible because the Greek economy is just 2% of the Euro zone GDP. but here again it  already had plenty of noise knock on effects. These effect could be termed as “contagion” I am not used to this word since the subprime crisis.

Another question that comes in to mind can he economic epidemiology predict which countries may fall sick following the Greek exit ? There has been working papers confirming that a crisis in one country increased the probability of crisis in others. Big markets and big economies tend to have a bigger impact not a surprise, but the small economies infecting the bigger economies cannot be ruled out. some of the examples can be 1994 Mexico crisis resulted slump across latin America. 1997 Thai market fell suddenly and along with it Indonesia, Hongkong and Canada where majorly affected.

The latest research that I read “pure contagion”, its occurs when the credit spreads above & beyond that can be explained by links between the economies. The investor has to pay for to insure themselves against the risk that a euro-are country will default on its debts ( CDS and CDS spreads). This cost of insurance has been rising for many euro countries since 2009 and Greece leading the way .

Markets now put a much higher probability up to 45% on Ireland and Portugal also defaulting if Greece fails. Another analysis on countries sovereign bond yield suggests that the variability in Spanish and Italian bond yield was due to contagion from Greece, Portugal and Ireland rather the domestic factors.

To conclude the above expect the unexpected as the path for the pure contagion is devilishly hard to predict . The market data cannot predict contagion , its like airborne virus that can change directions with the wind . ( The source was from paper by Vitor Constancio Vice president at the ECB)

2 thoughts on “Contagion Predicting for Euro

  1. hey I wana point out two things. I may be wrong: an important aspect besides the size of the economy, is the linkages between the countries. greater linkgae implies higher chances of contagion transmission. second, the cirsis are magnified also by the celebrated ‘market expectations’. just like psychology works a lot in perceiving a monster bigger than it is.. so is here.. wat do u think?

    Like

    1. Yeh I belive its more a psychological rather than the size of the economy. Analyzing the past crisis the conclusion cannot be drawan as the present scenario is where we have more globalized economies and are more dependent and the forex market is much bigger . . But still the exact prediction cannot be made

      Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s