What Happens if Greece Defaults?

V-Span loses his pig farm.

 

How did DaDakota get access to Judoka's account? He's the only one I can think of here obsessed with V-span's meat...

 

banks in europe have a bunch of defaulting loans, that may affect banks in america who do business with those euro banks.

 

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That's what your mom said.



DD

 

In the short run, it means companies with exposure to Greek sovereign debt---including American banks who may not have direct exposure, but indirect exposure through other investment forays, will have to write-down debt, and claim quite a few losses.

A lot of large European banks (most notably the European Central Bank and the Bundesbank) are holding Greek debt, which in essence, just like subprime mortgages, will have to be marked down drastically from their current values.

If this Greek debt is significant enough in the balance books, in a worst-case scenario, European banks may start falling a la Lehman Brothers-Wall Street part 2.

(However, this could be somewhat mitigated from the fact that a Greece write-down/default has been in the cards for some time now, which has hopefully allowed the banks some time to already begin writing off some losses.)

American banks could also be affected from, once again, being on the wrong side of credit-default swaps, and may have to pay out large to speculators betting on Greece defaulting.

The Euro will fall. Germany will, if it is true to its' words, go through hell and back to rescue the rest of the periphery states (Portugal, Ireland, Spain) and salvage whatever it can from Greece. This will probably cause much unrest and will most probably boot Merkel, who is already in a tenuous position, out of office eventually. You will probably see a rise then of a strong nationalist German government that refuses to help the EU in any way(I am not even f***ing joking about this prediction). then, god knows.

Then again, it might not be the end of the world---Iceland is doing alright right now. Obviously, there are questions of scope and riots, and the two are vastly different countries, but by and large, the Iceland situation shows it is not impossible to raise back from the brink of bankruptcy.

As for actual bankruptcy itself...

the caveat here, however, is that now Argentina is failing once more, which leads me to posit that a default is not the worst of things, if you can change what caused the default in the first place. If your economy is fundamentally bad and requires the money of others to nurture, you're basically f**ked. Greece is kinda in that boat, though I do think that with a structured default that doesn't involve flipping the bird off at the IMF and investors, things can actually end quite well.

 

One of the major problems here is the IMF itself. In that regard, I think a default is actually preferable.

 

The IMF, in of itself, is not the real problem.

The real problem is Greece's ridiculous government accountability when it comes to debt.

http://www.vanityfair.com/business/features/2010/10/greeks-bearing-bonds-201010

However, truth be told, the IMF is a compounding problem-one that will bring disastrous instability with forced austerity cuts just to save investors' hides, and which will bring even further debt on Greece.

If one were to be honest however, Greece really needs to shape up no matter what happens.

A structured default without the IMF around would have been ideal. However, with the Greek parliament having just passed the austerity measures to receive more IMF aid, we would be crying over already spoiled milk.

 

That's what I was referring to. Obviously, the debt is Greece's fault for acting like a twit with too many credit cards. But the IMF has a long and well-documented history of totally ****ing up every single "bailout" they've orchestrated. Ergo, Greece should just default. **** the IMF - the idiot bankers that financed this nonsense should pay too, not just the poor and disenfranchised Greeks being hosed by "austerity".

I mean, this is exactly what they did in Asia, and exactly what Stiglitz absolutely reamed them for when he left. And they're doing it again - the motivations are so obvious it should cause the Greek populace to revolt in entirety a la Indonesia.

 

The Irony of Argentina is people's continued belief in the strength of soverign debt despite historical context.

Argentina has defaulted on its debt 4 times in the last 200 years, and each time paying about 30 cents on the dollar. And each time within 10 years they were given more debt than before.


Greece is a relatively small country with only around 80 billion in debt owed mainly to French banks and the German public. The fear is not the 80 billion from there but a contagion affect on Spain whose debt load is 10x that of Greece.

These countries represent a failure of European style state socialism in which people are able to manuver to get more and more from the governments which are finally at a point in which they cannot borrow any more. You have populations promised entitlements by politicians and then are living a life beyond what they and their country produces, that differenc in their lifestyle and their actual GDP per capita is borrowed and subsidized by others until the music stops.

A sad state of affairs and I believe we should be mindful of these problems as we look into our own Nation's financial future.

 

If you are really interested in Greece, read this vanity fair Michael Lewis article, its awesome.

Beware of Greeks Bearing Bonds





edit: didn't see its same article that northside posted

 

Ok, I just read the Lewis piece and much of my sympathy for the average Greek worker has disappeared.

 

The funny thing is though, debt from the Euro crisis seems to have exposed two sides of the same ugly coin.

Greece was classic "socialist dystopia", one that is used by American pundits to describe Europe in general, as a debt w**** gone out of control. It is something that applies to the American situation.

But Ireland was the model financial student who balanced budgets every year, and yet due to lax financial regulations, failed on the incompetence of their private banks. It is something that applies to the American situation as well.

I am forced to conclude that the best way for a country to comport itself is to have balanced budgets with stringent financial regulations. This is most similar in style to the democratic socialist provincial governments of Tommy Douglas in Canada, or to the Scandinavian nations of Denmark, Sweden, Norway, and Finland.

 

This is a complex issue - the simple reality is that no one actually knows. Several things:

(1) If Greece goes down, the Euro has problems. It risks contagion into Ireland, Italy, Portugal. If those countries go down, Europe probably goes down. If that happens, you have Financial Crisis 2.0. In that regard, lots of people compare Greece to Lehman Brothers. They are relatively small, but interconnected enough to drag everything else down. The problem is that no one knows how interconnected, so no one knows how severe any contagion would be.

(2) If Greece goes down, European banks immediately have problems. This could require a bailout of some sort for those banks. Germany and France - the power brokers here - don't want to be dragged into bailing out banks or bailing out more countries, so they are trying to save Greece.

(3) In the long run, Greece is f-ed. I don't think there's any way to save them unless Europe just gives them free money. Austerity has been a disaster. They went through this last year; they cut their government a lot and got a bailout. As a result, the economy shrank 8% and thus their revenues dropped, putting them in the same position again now. This will just happen again and again, leaving Greece with a smaller and smaller economy and a bigger and bigger debt.

(4) The Greek people, while they've made a lot of mistakes and lived off this largesse, have a different view. To some extent, they see #3 happening already, and they are wondering why they have to go through this austerity in order to save the banks of Europe. From their perspective, it makes some sense to default and just start over - bondholders knew the risks, and if those risks don't pay off, they should lose out.

(5) If not for the Euro, this would be an easy problem to solve. You hyperinflate, pay off all your debt, have worthless currency, etc. Because Greece can't print currency, they are stuck. Or you just default. But Europe doesn't want that.

(6) China has a lot of Euro debt and wants to have more. So they have actually offered to step in and try to save Greece in order to save the value of the Euro. The last thing they want is the US Dollar to again become the sole reserve currency. No idea how this will play out.

This is another case of "too big to fail", except on a country level. In the long-run, Greece is likely to either default or be kicked out of the EU and go back to their old currency. All these bailouts are doing is buying time and pushing more of the risk onto the public sector and away from the banks. In the longer-run, I think this is the beginning of the end of the Euro - the whole thing was a terrible idea specifically because of this. It eliminates the ability of individual countries to manage their own monetary policy, and it makes all the countries - who have different laws and different financial structures - all interdependent on each other.

Interestingly (and sadly), Obama's 2nd term sort of depends on Europe saving Greece. If Greece collapses, it almost definitely is a massive shock event that creates some kind of second recession. In that scenario, even Rick Perry could beat Obama next year.

 

This should definitely happen, as they blatantly failed/lied regarding the stipulations to move to the Euro.

 

errrrrrr

not a particularly good idea.



I don't really see why people would prefer hyperinflation to default. At this point, it's pretty much a taboo on default or something, because hyperinflation is one of the worst things that can happen to a country, period. You're better off just telling the investors you can't pay, rather than printing money out of thin air to maintain some semblance of being able to pay.

 

You need to inflate some, or you end up with the IMF created disasters in Asia.