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| Europe |
| What happens when Greece defaults |
| 2011-05-22 |
| 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... |
| Posted by:tipper |
| #8 EC, I'm afraid you are wrong. The only way to keep Greece in the Eurozone is to print money and Germany won't allow that. Western governments have spent north of a trillion dollars saving the banks and they will go bust anyway. BTW, there is a horrible real estate crash coming. |
| Posted by: phil_b 2011-05-22 21:34 |
| #7 Our problems have not "solved" by the borrowing and printing of more dollars either, but that is what is happening. |
| Posted by: Besoeker 2011-05-22 19:07 |
| #6 "The problems of Greece are structural ones. They won't be solved FTFY, EC. |
| Posted by: Barbara Skolaut 2011-05-22 19:04 |
| #5 @Procopius2k Banks may nominally still be "German" or "French", but in fact banks have long ceased to be national entities. They are interdependent global, organizations. "Greece will redenominate all its debts into "New Drachmas" or whatever it calls the new currency (this is a classic ploy of countries defaulting)" No, that's one thing they cannot do because their debts are in euros. That's the problem with reverting to drachma. Even if you "forgive" them 50% of their debts, the drachma will plunge, which means they will still face up to about the same debt burden as before. The problems of Greece are structural ones. They won't be solved with a currency change. |
| Posted by: European Conservative 2011-05-22 18:51 |
| #4 No more Feta? |
| Posted by: Deacon Blues 2011-05-22 16:28 |
| #3 - A number of French and German banks will make sufficient losses that they no longer meet regulatory capital adequacy requirements. And guess who'll bail them out? European banks took big slice of Fed aid The Financial Times ^ | DECEMBER 1, 2010 | Robin Harding and Tom Braithwaite Posted on Wednesday, December 01, 2010 4:31:06 PM by RobinMasters Foreign banks were among the biggest beneficiaries of the $3,300bn in emergency credit provided by the Federal Reserve during the crisis, according to new data on the extraordinary efforts of the US authorities to save the global financial system. The revelation of the scale of overseas lendersÂ’ borrowing underlines the global nature of the turmoil and the crucial role of the Fed as the lender of last resort for the worldÂ’s banking sector. However, news that banks such as Barclays of the UK, SwitzerlandÂ’s UBS and Dexia of Belgium borrowed billions of dollars at favourable terms from the US government may further anger critics already enraged about the FedÂ’s bail-out of Wall Street. After being ordered by Congress to lift the secrecy on the crisis-time aid, the Fed published the details on Wednesday of more than 21,000 transactions with banks from 2007 to 2010. |
| Posted by: Procopius2k 2011-05-22 14:36 |
| #2 Or if Athens would retreat to its 490 BC borders. |
| Posted by: Matt 2011-05-22 13:04 |
| #1 Wouldn't be happening if there was justice for Palestinians. |
| Posted by: gr(o)mgoru 2011-05-22 12:57 |