Why it’s so hard to predict the impact of a Greek default

Greece continues to teeter on the edge of default, and possibly exit from the euro zone.

So if the long-feared default finally comes to pass, how will market react?

For Larry McDonald, head of U.S. strategy with Societe Generale's macro group, the reaction will look like a classic risk-off one, with investors fleeing riskier assets for safe havens.

"If they default, I think we see U.S. stocks down 5 to 10 percent over the course of, say, three months," McDonald said Wednesday in a "Trading Nation" interview. "But bonds, I think you'd see a substantial rally in bonds, because the global economy has been slowing down. The global economy can't take that much disruption."

"You'd probably see a stronger dollar" as well, McDonald added, as the euro would weaken on such an event.

Boris Schlossberg, a currency trader with BK Asset Management, agrees that "there will be some safe-haven flows into the dollar," but on the whole, doesn't believe the impact on financial markets would be particularly treacherous.

"They've sort of been able to fence most of the problems around Greece," Schlossberg said. "Greece is a tiny part of the euro zone. I also think the [European Central Bank] will probably step up and create a tremendous amount of liquidity just to make sure there's no kind of contagion."

But at the end of the day, it's the cross-border financial impact that would matter, if anything. The impact on those financial institutions or sovereign entities holding Greek bonds could be quite sharp.

"The critical thing is, you just don't know who else has exposure outside of the known actors," Schlossberg said. "So it could be a nonevent, or it could be something much more serious, depending on how the situation develops."

"When you have an event like this, there's a 30- to 60-day period when you really cannot identify the risk," McDonald agreed.

He points out that the spread between Spanish and German bonds, and between Portugese and German bonds, "are blowing out now, so people are pricing in a contagion over to those countries."

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