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European crisis fades




More evidence that the financial crisis in Europe is fading. Euro swap spreads are down 25 bps from their late-May highs. Greek 5-yr credit default swaps are down over 300 bps over the same period. US swap spreads are firmly in the range of what would be considered "normal."

I wish I had time to elaborate, but to me it is apparent that the real risk that everyone worries about is a systemic problem, such as a Greek default, that pushes the international banking system to the verge of default—a cascading series of defaults that leaves most developed economies paralyzed. The action so far suggests that this is simply not going to happen. What we're left with is the concern that there are still lots of debt defaults that are likely to occur. The question of the day is whether these defaults will disrupt global growth significantly. I doubt they will. Debt gets defaulted on all the time, and the world has suffered through pretty massive defaults (e.g., the serial defaults of Latin American countries in the early 1980s, the Mexican default of the early 1990s, and the $100+ billion Argentine default several years ago) without really skipping a beat. After all, debt doesn't create growth, so wiping out debt doesn't necessarily destroy growth. It can be disruptive, to be sure, but it's not a growth killer per se. All it amounts to is tearing up pieces of paper that say that party A will devote some of his future cash flows to party B.

Controversial, I know, but perhaps it will spark some debate. Meanwhile, I've got to get ready to explore another Egyptian ruin, this time at Kom Ombo.

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