what happens when greece defaults

[jk]

http://blogs.telegraph.co.uk/finance...eece-defaults/

What happens when Greece defaults

By Andrew Lilico

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…

[we_are_toast]

Re: what happens when greece defaults

Interesting.

Under this scenario, do Europeans dump Euros in favor of Gold/dollars? Does the price of gold rise in Euros and drop in dollars, or does the European demand for gold offset the rise in the dollar against the index? Does Bernanke think Europe is TBTF?

[jk]

Re: what happens when greece defaults

yes, i think europeans buy gold and dollars. i think gold rises in dollars, but rises more in euros. bwtfdik?

an interesting article from der spiegel states that private german banks only hold about 25b euro in greek debt. but their conclusion, after saying that the commercial banks could handle a 50% greek haircut is this:

But the situation looks different for the German government and the federal states. At the very least, the large exposure of KfW and the bad banks of Hypo Real Estate and WestLB could end up being expensive. Taxpayers might need to step in, as might the savings banks that are owned by municipalities.

In addition, the European Central Bank (ECB) has bought up tens of billions of euros of Greek sovereign bonds. Because the Bundesbank, Germany's central bank, holds more than a quarter of the ECB's capital, it would have to take its share of losses accordingly.

So nothing to worry about, then? Not quite, even if a debt haircut for Greece would appear to be manageable for Germany. The greatest dangers of such a course of action lurk elsewhere. The Greek banking system would probably break down, while the country would find itself unable to borrow on the financial markets for a long time.

And a partial Greek default could also result in an aggravation of the euro crisis for a different reason. If Ireland and Portugal were to be infected by the debt restructuring virus, the situation would quickly spin out of control. In that event, private banks, insurance companies and investors in Germany would definitely feel the consequences.

http://www.spiegel.de/international/...765318,00.html

[c1ue]

Re: what happens when greece defaults

Interesting ideas, but this article seems more ideological than factual:

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

- Every bank in Greece will instantly go insolvent.

This might happen, but only if the government of Greece deliberately chooses to ignore all precedents. For one thing, the first action should be a bank holiday.

For another thing, so long as revaluation occurs, the actual balance between any bank's obligations and its assets doesn't change - at least for Greek customers. So if they are insolvent after, that meant they were insolvent before.

- The Greek government will nationalise every bank in Greece.

See above. Nationalization may or may not be necessary - it all depends on what the government of Greece and the newly formed Greek Central Bank does.

- The Greek government will forbid withdrawals from Greek banks.

I doubt this would do any good - the bank holiday is far more appearance positive (or at least least negative)

- 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.

Argentina pegged its currency to the dollar, then froze all access including dollar access.

Greece will have to have a bank holiday, but in the instance of withdrawing from the euro the immediate effect should be an arbitrary conversion of euro deposits into drachmas (or whatever). As for rioting - they're rioting already.

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

Agreed

- 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.

Agreed, though what exactly is a Greek euro-denominated bond? Certainly the Greek government bonds could be called this, but what about private debts? private cross border debts? Greek corporate debt? Multinationals with divisions on Greece debt? etc etc

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

This seems a huge stretch given that the Irish government seems perfectly willing to ignore its population.

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

Another stretch given Portugal just got bailed out.

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

This definitely won't happen. If the US is willing to mark to fantasy - I have no doubt that the French and German regulatory authorities are willing to do the same.

- 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.

This is complete nonsense. The ECB can, unlike the government of Greece, print money.

- 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.)

The writer just contradicted his previous point.

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

Meaningless. Every bailout to date has said the same thing.

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

What does this 'carnage' mean? Beyond the existing interest rate spikes for Spanish debt?

- 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.

See mark to fantasy above

- 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.

And just what exactly does the European Court of Human Rights have to do with bond defaults?

Being paid for a bond is hardly a fundamental tenet of human liberty.

Perhaps the writer mean the European Court of Justice.

- Attention will turn to the British banks. Then we shall see…

Uh, right. What exactly does the euro failure have to do with British banks?

[jk]

Re: what happens when greece defaults

Interesting ideas, but this article seems more ideological than factual:

This might happen, but only if the government of Greece deliberately chooses to ignore all precedents. For one thing, the first action should be a bank holiday.

For another thing, so long as revaluation occurs, the actual balance between any bank's obligations and its assets doesn't change - at least for Greek customers. So if they are insolvent after, that meant they were insolvent before.

i'm sure you're right- they are all running on extend and pretend, and if their holdings were marked to market, they would already be insolvent.

See above. Nationalization may or may not be necessary - it all depends on what the government of Greece and the newly formed Greek Central Bank does.

I doubt this would do any good - the bank holiday is far more appearance positive (or at least least negative)

what's the difference between a bank holiday and freezing deposits?

Argentina pegged its currency to the dollar, then froze all access including dollar access.

Greece will have to have a bank holiday, but in the instance of withdrawing from the euro the immediate effect should be an arbitrary conversion of euro deposits into drachmas (or whatever). As for rioting - they're rioting already.

yep.

Agreed, though what exactly is a Greek euro-denominated bond? Certainly the Greek government bonds could be called this, but what about private debts? private cross border debts? Greek corporate debt? Multinationals with divisions on Greece debt? etc etc

i take him to mean that greek gov't bonds denominated in euros will be redefined as payable in new drachmas. quite the haircut.

This seems a huge stretch given that the Irish government seems perfectly willing to ignore its population.

Another stretch given Portugal just got bailed out.

ireland and portugal will be immediately priced out of the bond market as private institutions will reassess the probability of more defaults. then it's just a question of whether the ecb is willing to go to quantitative easing for them.

If the US is willing to mark to fantasy - I have no doubt that the French and German regulatory authorities are willing to do the same.

if greek gov;t debt is redenominated in new drachmas, banks will not have the option of carrying them in euros. extend and pretend only works when everyone plays along. that's one reason banks drag out their foreclosures- they can't pretend the mortgages are worth face value once they've foreclosed.

This is complete nonsense. The ECB can, unlike the government of Greece, print money.

only when they give up on making believe they are the reincarnation of the bundesbank. germany will be in a pretty pickle, in terms of their domestic politics.

What exactly does the euro failure have to do with British banks?

uk banks are into the pigs for euro 350billion

However, banks in Germany, France and the UK remain deeply vulnerable with commitments of over EUR 1 trillion:



http://marketsandbeyond.blogspot.com...countries.html

[c1ue]

Re: what happens when greece defaults

what's the difference between a bank holiday and freezing deposits?

For one thing, during a bank holiday you don't let any angry people into the bank itself.

For another thing, with a bank holiday all financial transactions are basically put on hold. While the ability to draw on deposits is interrupted, so too is the right to receive (re)payment.

Argentina hosed up by not understanding this difference.

i take him to mean that greek gov't bonds denominated in euros will be redefined as payable in new drachmas. quite the haircut.

That may be true, but the real problem with an exit from the euro is how these other euro denominated paper instruments are to be handled.

And they must be handled. I can see right now the lines at various Greek and other banks where private paper is to be exchanged for 'hard' or 'old' Greek currency.

if greek gov;t debt is redenominated in new drachmas, banks will not have the option of carrying them in euros. extend and pretend only works when everyone plays along. that's one reason banks drag out their foreclosures- they can't pretend the mortgages are worth face value once they've foreclosed.

Not necessarily at all.

You are assuming still that extend and pretend must hold some resemblence to reality.

For example: The various banks sue Greece for failure to repay debt. So long as the lawsuits are dragged out, the banks value the debt at euro par.

only when they give up on making believe they are the reincarnation of the bundesbank. germany will be in a pretty pickle, in terms of their domestic politics.

Given what has happened in the US: i.e. $13T printed by the Fed but very little of it trickling down into prices (so far)- not clear why the ECB can't do the same.

uk banks are into the pigs for euro 350billion

However, banks in Germany, France and the UK remain deeply vulnerable with commitments of over EUR 1 trillion:

Sure, but Spain also has far higher assets than Greece does. I do absolutely think the PIIS are in a pickle, but on the other hand their economies do have some capability to repay as well as greater assets in ratio to debt.

[jk]

Re: what happens when greece defaults

Sure, but Spain also has far higher assets than Greece does. I do absolutely think the PIIS are in a pickle, but on the other hand their economies do have some capability to repay as well as greater assets in ratio to debt.

i don't know about that. what do you suppose mykonos is worth? how about crete?

[Starving Steve]

Re: what happens when greece defaults

Bernanke and Obama show the PIGS and the European Central Bank how to handle a default: 1.) Bail-out everything, and look to bail-out more such as bailing-out North Africa with a "new Marshall Plan". Everything is too big to fail. Certainly, the PIGS are too big to fail. 2.) The Fed will buy-back its bonds, and maybe buy-back your bonds, too. 3.) Keep interest rates at zero, forever. 4.) Let government spend money forever, including the U.S. Congress. Why should there be any limit? 4.) A falling currency is good, especially if other currencies fall too. Money forever, for all people because inflation is good. We want demand. 5.) Cheaper dollars are easier to earn, easier to pay-back, and even easier to print. So deficits don't count, and we can kick-the-can forever. The concept of a moral hazard is for old farts. A managed default is in everyone's best interest. 6.) The central bank can and should control everything. 7.) It's all paper, so who cares? "And in the end, we are all dead anyway." 8.) Inflate the bubbles, the stock market, the commodities, the government, the military, the bail-outs, the promises, the Marshall Plans, and print........forever. 9.) Let the dollar fall. Who cares? Print more. And it helps exports too! Prices rise. Profits rise. It's lovely! 10.) Full-faith and credit. Everything in life is just an illusion. "Money is just a tool." 11.) Debt is savings, or it should be. 12.) Consume everything, and then consume more. 13.) Robots and computers can run the world, and people can provide services to each other, or sit home and consume. 14.) Let people work on solar power and green stupidity, who cares? 15.) The central bank buying-back its own bonds proves to the world the worth of those bonds. The central bank buying its own inflation-protected bonds proves to the world that there is no inflation. 16.) The central bank buying stocks in the stock market proves the value of the stocks in that market. 17.) The Fed or any central bank buying Greece's debt proves Greece is a good credit risk. 18.) Greek bonds can back the U.S. dollar or the Euro dollar, or both. Every central bank can hold the debt of the other. That debt then becomes an asset. This establishes general confidence in sovereign currency and sovereign debt..... The can is kicked down the road to a new generation or inflated away to nothing.

[touchring]

Re: what happens when greece defaults

http://blogs.telegraph.co.uk/finance...eece-defaults/

What happens when Greece defaults

Geez, if i were a Greek, i won't put my money into a Greek bank won't I?

[BigBagel]

Re: what happens when greece defaults

The Irish have a working population of a little over 2 million people.
The government pumped 46 billion euro into a banking system that still needs more.

Do the math on that one.

[c1ue]

Re: what happens when greece defaults

i don't know about that. what do you suppose mykonos is worth? how about crete?

And what are the road/bridge/sewage/water/electricity public utilities in a nation of 46M worth? vs. Greece's 11M who are also (somewhat) poorer?

And what about Mallorca? Minorca? Ibiza? Tenerife?

[jk]

Re: what happens when greece defaults

i think the issue is whether the oligarchs/banksters can force governments all around the world to sell public assets to pay debt service, while the same banksters are the purchasers of those assets, or at least the financers of those who buy those same assets. wealth is ever more concentrated.

[mmr]

Re: what happens when greece defaults

Has there been an example of an accelerated, unplanned replacement of the currency of a reasonably developed nation outside of wartime? Certainly there have been numerous devaluations, depeggings, and the like over the last few decades, but even in Argentina or Mexico, the peso remained the unit of account (if not a store of value).

However, I can't recall a case where the functional currency was replaced under duress over a very brief period, particularly when the former functional currency continued to circulate widely and was significantly more valuable than the new currency.

The operational aspects alone would be a nightmare - in addition to the treatment of euro-denominated debts and contracts, it's unclear how difficult it would be to convert the payment systems back to drachmas (or to support parallel drachma / euro pricing). Unless someone has been planning ahead, it's unlikely that there's a big pile of new drachmas lying around ready to be put into circulation while the electronic payment systems are being fixed. For those reasons alone, any bank holiday would likely last more than just a few days; any ongoing commerce would have to rely on euros held outside of the banking system, many of which will be fleeing the country along with their holders. Barter, anyone?

Interesting note: the Bank of Greece does literally have its own euro printing press, which might come in handy in such a situation.

[raja]

Re: what happens when greece defaults

Defaults trigger CDS contracts. Cascading global financial crisis?

[Alvaro Spain]

Re: what happens when greece defaults

I like very much iTulip, but I find that many of the viewpoints expressed here are too USA-UK-centric.

I know very little about economy and politics, but I make a serious effort of getting informed. I will paste from a newsletter one of the prevailing views of Euroland analists. I hope that you can read french.

For those who can't read french: european analists think that concerns about Greece are fueled by USA/UK interests in order to hide their own problems.

"...

Quand Athènes vise à cacher Londres et Washington
La Grèce est de retour en une des médias anglo-saxons. Alors, comme l'année dernière à la même
époque, il faut chercher non pas la « femme » mais « la poutre dans l'oeil » de Washington ou de
Londres. L'année dernière, la « crise grecque » avait été utilisée pour détourner l'attention du risque
majeur britannique incarné par une situation budgétaire explosive et une situation politique dangereuse
(avec des élections sans parti majoritaire). L'opération avait réussi à éviter que le monde se rende compte
que le Royaume-Uni s'était « FMIsé » tout seul comme l'a montré la mise en place d'un plan de coupes
budgétaires drastiques dans les trimestres qui ont suivi, que même le FMI version 2011 (moins
idéologique qu'il y a quelques années) aurait hésiter à imposer à la Grande-Bretagne.
Mais c'était une victoire à la Pyrrhus sur deux aspects essentiels. D'une part, elle avait poussé l'Euroland a
réalisé un coup d'état au sein de l'Union Européenne, marginalisant définitivement le Royaume-Uni et
précipitant l'émergence d'un « nouveau souverain » qui s'étoffe chaque trimestre un peu plus en terme de
processus de gestion de crise financière et de gouvernance41. D'autre part, la « FMIsation » de la politique
britannique42, habillée d'un concept vide de sens comme la « Grande Société » de David Cameron, s'avère
un an plus tard un échec social, économique et budgétaire : le fait qu'au premier trimestre 2001, la Grèce,
affligée de toutes les tares par la presse anglo-saxonne, a réalisé une croissance supérieure à celle du
Royaume-Uni, voilà ce sur quoi devraient titrer les médias !

Ainsi, selon notre équipe, le grand retour de la Grèce dans les médias financiers, y compris avec des
concepts aussi aberrants que la sortie de la Grèce de la zone Euro, est signe d'une nouvelle crise grave au
Royaume-Uni, et cette fois-ci aux Etats-Unis également car les médias américains sont très en pointe sur
le sujet. Nous avons déjà identifié dans les GEAB précédents l'évènement américain à camoufler : il s'agit
de l'impossible fin du QE2 (voir précédemment ses conséquences sur les Bons du Trésor US et le
Dollar43).
Pour le Royaume-Uni, c'est une sorte de retour à la situation ex-ante de mai 2010, mais dans un état bien
pire car toutes les cartouches ont été tirées. Il y a à nouveau une crise politique suite à l'effondrement
des Lib-Dem, partenaires des Conservateurs dans la coalition actuellement au pouvoir. Les Libéraux-
Démocrates viennent de comprendre qu'ils ont été les « dindons de la farce »44 et vont refuser
dorénavant de cautionner les mesures budgétaires les plus dures du gouvernement Cameron. L'ambiance
politique britannique s'oriente donc à nouveau vers l'instabilité chronique qui avait été évitée de justesse
en mai dernier ; y compris désormais une perspective d'éclatement du pays avec la perspective d'un
probable référendum sur l'indépendance de l'Ecosse suite au raz-de-marée électoral des indépendantistes
écossais45.

Et désormais l'instabilité sociale s'est installée, illustrée par l'immense manifestation d'avril dernier si peu
couverte par les médias alors qu'on a pu constater combien une manifestation de faible importance à
Athènes faisait à nouveau la une partout. Parallèlement tous les chiffres macro-économiques se
détériorent46 et les besoins de financement public ne régressent pas, orientant le pays vers un nouveau
risque de crise de la dette publique.
Le second semestre 2011 verra certainement de nouveaux rebondissements dans la crise des dettes
publiques de la périphérie de l'Euroland. Mais comme nous l'avons indiqué dans le GEAB N°50, la
principale conséquence en sera la décision par l'Euroland de faire payer une partie des coûts par les
investisseurs, banques comprises. Mais nous insistons sur le fait que les têtes de file des pays qui vont
contribuer à cette fusion explosive de la crise au second semestre seront non pas la Grèce, le Portugal ou
l'Espagne, mais les Etats-Unis47, le Royaume-Uni et le Japon (qui est désormais également en première
ligne du choc à venir, coincé entre sa récession post-tsunami et son endettement public faramineux sans
aucun leadership politique crédible48).

..."