Here Is What Happens After Greece Defaults

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When it comes to the topic of Greece, by now everyone is sick of prevaricating European politicians who even they admit are lying openly to the media. and tired of conflicted investment banks trying to make the situation appear more palatable if only they dress it in some verbally appropriate if totally ridiculous phrase (which just so happens contracts to SLiME ). The truth is Greece will fold like a lawn chair: whether it's tomorrow (which would be smartest for everyone involved) or in 1 years, when the bailout money runs out, is irrelevant. The question then is what will happen after the threshold of nevernever land is finally breached, and Kickthecandowntheroad world once again reverts to the ugly confines of reality. Luckily, the Telegraph's Andrew Lilico presents what is arguably the most realistic list of the consequences of crossing the senior bondholder Styx compiled to date.

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

  • 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…
  • Source:

    Category: Forex

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