Scenarios of A Greece Default

Andrew Lilico writing in the UK’s Telegraph draws up a litany of possible scenarios of a Greece default.

He writes,

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)

Read the rest here

I share Austrian economics Professor Dr. Antony Mueller’s opinion, that these exactly serve as main reasons why Greece would likely avoid a default.

It’s more than just economics as the Greek or PIIGS crisis would mostly account for politics.

As the Economist wrote last April (bold emphasis mine)

THE announcement on April 6th that Portugal will become the third euro-area country to receive a bail-out was not well received in Germany. As the largest euro-area country, it is contributing 20% or €52 billion ($75 billion) to the bail-out funds of the three profligate countries, mostly via the euro area's European Financial Stability Facility. This is dwarfed however, by Germany's banks' exposure to the three countries, which totals €230 billion. Only around 12% of this is sovereign or public debt, but a sovereign default could easily lead to a slew of domestic bank and corporate defaults too, to which the country is far more exposed. America is also footing a cool €14 billion via the IMF's contribution to the bail-out. But it too seems to have got good value for money—its banks have a total of €144 billion in exposure to the three countries.

And as earlier said, today’s monetary architecture makes for an intricate web of entwined cartel and patron-client relationships among central banks, governments and the banking system.

Unless we see a systemic crisis unravel, any resolution will likely be molded around these political relationships. Expect more inflationism to be used.