Tuesday, 31 May 2011

WHAT HAPPENS IF THE GREEKS DEFAULT?


        The end is nigh, prepare for Armageddon, the banking world is in shit creek and the system is about to explode. Of course most people with any knowledge of capitalism know that it is unsustainable and will eventually collapse, the financial sector is just part and parcel of that same system. Our problem is not so much the collapse of the system, but how do we react to that  catastrophic event? Will we fight to get it back on the rails, so that we can get back to borrowing and getting ever bigger mortgages, back to a job with crap wages and an never ending struggle to get an increase that will help you survive? Or will we decide to take control ourselves and change the entire system to one free from the profit motive, bond holders and financial spivs? The following is an extract form a much longer and more detailed article HERE.

What Happens if the Greeks Default?

       Andrew Lilico, writing in the London Telegraph, gives us the answer to that question with a series of short bullet points. I might not agree with all of them, but he is looking in the right direction. (quoting from 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 nationalize 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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