I fail to see how a Greece debt restructuring would negatively impact the US economy except to cause a little more fear on wall street.
Also - anyone else notice that the only people who seem to give praise to Greenspan are his ex-colleagues in the central bank?
These instruments are, by themselves, not particularly dangerous. What is dangerous is that there is generally no regulatory requirement for the people who are selling these contracts to actually have any money, which means that the people who are buying these contracts might be greatly understating their exposure. If there are large numbers of outstanding unbacked CDS, the situation is similar to what occurred with AIG in 2008. Because CDS are not exchange traded, we don't have a reasonable way of knowing how much risk is out there.
Is $41 billion at risk insignificant?
http://www.marketwatch.com/story/greece-poses-41-billion-ris...
Compared to my personal holdings, I'd be willing to consider even half of that amount significant. Send my bailout as a check or money order, please.
Plus the $41 billion number is just an estimate; the real total won't be known until all the derivative contracts are unwound.
Either way, it would be a mistake to dismiss a Greek default as irrelevant to us.
Out of the 700 billion TARP fund, only 51 billion remains outstanding (as of September last year), which is larger then the 41 billion number you were floating around:
http://online.wsj.com/article/SB1000142405274870343160457552...
I'm not saying all banks will be fine if Greece "defaults" (remember in this case "defaulting" implies restructed debt), but causing a US recession? Highly highly unlikely.
But even according to the article you posted, bank balance sheets are still weak.
Losing $41 billion (or more, possibly, given the nature of these derivatives) is not going to be good news for them.
While technically not in recession, the economy is not thriving, either, and so one blow like this may indeed push it back into recession.
Also, from the article, the banks have a drop in the bucket exposure to these loans, which isn't even reporting in their annual reports as a risk. The highest exposure bank seems to be half a billion on BoA's balance sheets, and like I said, it isn't like that debt obligation is just going to disappear.
There's a lot of FUD around Greece "defaulting", and like I said, I think the main impact area will be the stock market, not necessarily bank balance sheets or the economy at large.
What do you think default means?
It has happened before, most recently with Argentina in 2002, and with Russia in 1998, which triggered the LTCM crisis.
"The worst I've heard is that they will restructure the loans to extend pay back dates."
That is just default in everything but name.
The reason the so-called seven year Vienna plan has so much resistance is that ECB members know they'll never get paid back.
It is a credit agency's definition of "default", but it won't be as adverse as the money disappearing from balance sheets.
So far, all proposals to do that have been shot down by the ECB b/c even with longer and more generous terms, Greece is not in a position to service the debt, let alone repay it.
But the problem with your assumption is that the real economic damage occurs just immediately after a disaster.
The reality is that the actual economic affects of the Japan earthquake will only begin to really show in the next five years. With what is happening at Fukushima now, and the associated supply chain disruptions that are already filtering down the creek, there should be serious cause for concern.
I personally made a long term bet in the Japanese market shortly after the quake, but you can "bet" that it won't pay off for a long time.