What happens when (not if) Greece defaults

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    Jun 04, 2011 8:34 PM GMT
    More than a little frightening. It seems inevitable that the Euro is gone.

    http://blogs.telegraph.co.uk/finance/andrewlilico/100010332/what-happens-when-greece-defaults/
    It is when, not if. Financial markets merely aren’t sure whether it’ll be tomorrow, a month’s time, a year’s time, or two years’ time (it won’t be longer than that). Given that the ECB has played the “final card” it employed to force a bailout upon the Irish – threatening to bankrupt the country’s banking sector – presumably we will now see either another Greek bailout or default within days.

    What happens when Greece defaults. Here are a few things:

    - Every bank in Greece will instantly go insolvent.

    - The Greek government will nationalise every bank in Greece.

    - The Greek government will forbid withdrawals from Greek banks.

    - To prevent Greek depositors from rioting on the streets, Argentina-2002-style (when the Argentinian president had to flee by helicopter from the roof of the presidential palace to evade a mob of such depositors), the Greek government will declare a curfew, perhaps even general martial law.

    - Greece will redenominate all its debts into “New Drachmas” or whatever it calls the new currency (this is a classic ploy of countries defaulting)

    - The New Drachma will devalue by some 30-70 per cent (probably around 50 per cent, though perhaps more), effectively defaulting 0n 50 per cent or more of all Greek euro-denominated debts.

    - The Irish will, within a few days, walk away from the debts of its banking system.

    - The Portuguese government will wait to see whether there is chaos in Greece before deciding whether to default in turn.

    - A number of French and German banks will make sufficient losses that they no longer meet regulatory capital adequacy requirements.

    - The European Central Bank will become insolvent, given its very high exposure to Greek government debt, and to Greek banking sector and Irish banking sector debt.

    - The French and German governments will meet to decide whether (a) to recapitalise the ECB, or (b) to allow the ECB to print money to restore its solvency. (Because the ECB has relatively little foreign currency-denominated exposure, it could in principle print its way out, but this is forbidden by its founding charter. On the other hand, the EU Treaty explicitly, and in terms, forbids the form of bailouts used for Greece, Portugal and Ireland, but a little thing like their being blatantly illegal hasn’t prevented that from happening, so it’s not intrinsically obvious that its being illegal for the ECB to print its way out will prove much of a hurdle.)

    - They will recapitalise, and recapitalise their own banks, but declare an end to all bailouts.

    - There will be carnage in the market for Spanish banking sector bonds, as bondholders anticipate imposed debt-equity swaps.

    - This assumption will prove justified, as the Spaniards choose to over-ride the structure of current bond contracts in the Spanish banking sector, recapitalising a number of banks via debt-equity swaps.

    - Bondholders will take the Spanish Banking Sector to the European Court of Human Rights (and probably other courts, also), claiming violations of property rights. These cases won’t be heard for years. By the time they are finally heard, no-one will care.

    - Attention will turn to the British banks. Then we shall see…
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    Jun 04, 2011 9:38 PM GMT
    http://www.bloomberg.com/news/2011-06-01/greece-s-second-rescue-is-readied-by-eu-urging-investors-to-buy-more-debt.html

    Greece Default Risk Raised to 50% at Moody’s as EU Readies Second Bailout
    Greece’s risk of default was raised to 50 percent by Moody’s Investors Service as European officials rushed to put together the second bailout plan in two years to stave off renewed financial turmoil in the region.
    Moody’s downgraded Greece to Caa1 from B1, putting it on a par with Cuba, according to a report published late yesterday. The move came after policy makers considered asking investors to reinvest in new Greek debt when existing bonds mature.

    Twelve years after the currency was started, European leaders are trying to prevent the euro area’s first sovereign default. A 110 billion-euro ($158 billion) rescue in 2010 failed to prevent an investor exodus from Greece, and the country now faces a funding gap of 30 billion euros of bonds next year with its 10-year borrowing cost above 16 percent.

    “Taken together, these risks imply at least an even chance of default over the rating horizon,” Moody’s said in a statement. “Over five-year investment horizons, around 50 percent of Caa1-rated sovereigns, non-financial corporate and financial institutions have consistently met their debt-service requirements. Around 50 percent have defaulted.”

    Vincent Truglia, managing director of global economic research for Granite Springs Asset Management LLC in New York, says the Caa1 rating “causes problems for certain investors” that are not allowed to hold such low-rated debt. Truglia, a former head of Moody’s sovereign risk unit, said the ratings move could affect the way investors view large European banks that hold Greek debt.
  • conservativej...

    Posts: 2465

    Jun 04, 2011 11:42 PM GMT

    Interesting isn't it, when one lives off of someone else's money?
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    Jun 05, 2011 6:22 AM GMT
    conservativejock said
    Interesting isn't it, when one lives off of someone else's money?


    And when they don't take any responsibility for it. Just frightening. Oddly though Obama is blaming the poor performance of the US economy now on Japan and Europe. I'm guessing the Bush meme isn't working out for him anymore.
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    Jun 05, 2011 7:12 AM GMT
    Interesting and scary!

    I had dinner a few weeks ago with some friends and the "when, not if" topic came up. We didn't go into nearly the same depth as the OP, but the four of us (2 Englishmen, 1 Irishman and an American) did agree that a Greek default could in turn lead to the end of the Euro-Zone. The whole euro concept was more political than economic to begin with and imbalances within the zone were never addressed and as we see in Greece, Portugal, Spain, Ireland and Italy, they're coming home to roost.

    We did toss around some interesting scenarios - Ireland leaving the euro and joining the UK in some sort of economic alliance; the euro basically becoming the currency for the central European/German countries and the Benelux countries; where will France wind up?

    But of course, we were only a group of mates having this conversation over dinner and drinks (maybe a few too many drinks icon_wink.gif ) - but whatever happens, it is not going to be pretty for the Greeks, the rest of the Euro Zone - or the US.
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    Jun 05, 2011 6:22 PM GMT
    NYBeef saidInteresting and scary!

    I had dinner a few weeks ago with some friends and the "when, not if" topic came up. We didn't go into nearly the same depth as the OP, but the four of us (2 Englishmen, 1 Irishman and an American) did agree that a Greek default could in turn lead to the end of the Euro-Zone. The whole euro concept was more political than economic to begin with and imbalances within the zone were never addressed and as we see in Greece, Portugal, Spain, Ireland and Italy, they're coming home to roost.

    We did toss around some interesting scenarios - Ireland leaving the euro and joining the UK in some sort of economic alliance; the euro basically becoming the currency for the central European/German countries and the Benelux countries; where will France wind up?

    But of course, we were only a group of mates having this conversation over dinner and drinks (maybe a few too many drinks icon_wink.gif ) - but whatever happens, it is not going to be pretty for the Greeks, the rest of the Euro Zone - or the US.


    I think the Euro is a goner. The incentives from the beginning were too large to cheat - especially since they admitted member nations that they already knew were cheating - or likely cheating in the application process to begin with. It absolutely is scary.