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Wednesday, 15 June 2011

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…
I hope that they don't do this before I go on Holiday.
Just saying.


  1. I'm not an economist or have studied the vagaries of the banking system. I have to have a bank account, because my employers have demanded I have one. I've never managed to save enough to worry about interest rates, before something came and took the money away.

    My question to you is this.
    should I take what little monies the state has left me out of Santander and put it in an envelope under the mattress.

  2. Two other things:

    1. The pound in your pocket ....... " will be worth a lot less than last month"

    2. Better that they do it before you go on holiday than whilst you're away.

  3. Pavlov's Cat. OMG. You have an account with santander! One of the worst banks to exist. And no, I can't advise you on the mattress savings as I don't know what exposure santander has in the bond market.

  4. A few comments I picked up from my two recent visits to Greece :

    (1) "They will never let the Greeks leave the Euro because it would devalue the overall asset value of the Eurozone"

    (2) "We will have left the Euro within 5 years"

    I suspect they will continue to throw money at Greece, the Greeks will take it, then they will bring back the Drachma. Canny buggers, yer Greeks!

  5. Advice to the Santander client:
    Take the money out.
    Better yet: Convert it to swiss francs.

  6. It is all very good, if only it wasn't copied and pasted from another blog... Unless you have something original to say, just shut up I say!!


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