Can Eurobanks Take a Greek Default?

The markets did not react well to the Friday combo plate of weaker than expected European growth, Chinese tightening ahead of the anticipated schedule, and less than convincing remarks regarding what if anything the EU intends to do about its little looming sovereign debt crisis. And top it off by having Greece PM Papandreou on his would-be rescuers, accusing them of stoking the crisis psychology that was working to his country’s disadvantage.

Now some grandstanding at home is probably necessary, given that Greece is almost certain to be subjected to daunting austerity measures and some lack of sovereignity. But snapping at the hand that has yet to you is not very smart. Swedish Lex, in comments, has indicated that this sort of behavior could scuttle the rescue operation.

But as much as there are ample reasons to suspect a bailout will not come together in time, there is one big reason to think that the powers that be will perceive it to be necessary: a Greek default would push the European banks over the edge. The large institutions were thinly capitalized in the good times, and have recognized even less of the losses sitting on their books than their US peers:

The recent credit crisis was over a few trillion in bad, mostly US, mortgage debts, with most of that at US banks. Greek debt is $350 billion, with about $270 billion of that spread among just three European countries and their banks. Make no mistake, a Greek default is another potential credit crisis in the making. As noted above, it is not just the writedown of Greek debt; it is the mark-to-market of other sovereign debt.

That would bankrupt the bulk of the European banking system, which is why it is unlikely to be allowed to happen. Just as the Fed (under Volker!) allowed US banks to mark up Latin American debt that had defaulted to its original loan value (and only slowly did they write it down; it took many years), I think the same thing will happen in Europe. Or the ECB will provide liquidity. Or there may be any of several other measures to keep things moving along. But real mark-to-market? Unlikely.

Yves here. This is to remind readers that as much as the press and the pols are depicting the Greek/Club Med problem as the the spendthrift vs. prudent nations, the problem not just the prospective extension of credit, but all the debt from these countries and their banks now sitting on the books of institutions in France, Germany, Switzerland, and Holland.

Bruce Krasting : that a lot of economists are focusing on external debt of the various wobbly countries, but that may not be the best metric for a looming crisis:

In the early 80’s damn near every country South of Texas went belly up. I know. I ran part of Citi’s FX biz during that period. All my public and private sector Latin American customers were shut out of the capital markets. Their existing debts traded for pennies on the dollar.

From my seat I saw that the problems always started with the domestic banks. Their offshore funding lines were canceled one by one. They could not reduce their balance sheets fast enough; they went to the local Central Bank who said “No Mas” and the next day all the lights went out.

Things are much different today than 30 years ago. But there are some similarities. Financial institutions in every country have enormous cross border exposure. If you want to measure solvency it is appropriate to base the calculation on a country’s net external debt number. But if you want to measure a country’s liquidity risk you have to look at the gross number.

Yves again. Of course, there is also a separate and yawning political problem: if you think bank bailouts went over badly in the plutocratic US, imagine how popular they would be in Europe. So trying to persuade the average German voter that a rescue of Greece is really in his best interest, because the collateral damage to European banks and the blowback to the real economy would be even more costly, is not a message politicians appear able to deliver successfully.

This makes for great theater, save for the wee complicating factor that we all have a stake in the outcome.

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50 comments

  1. Brick

    Lots of countries have exposure including the US, but probably the most exposed are the Greek banks. FTAlphaville had some nice charts up depicted exactly who was exposed to what and the thinking was that with hedging most banks could survive a Greek default.
    The problem is that the greek economy would struggle without access to credit and this would affect trade in other european countries. Since Greece is very big in the shipping line business any difficulties the Greek banks get into might have a serious knock effect to world trade.
    It is a dangerous scenario and you can expect action to be taken, but I don’t think the problem is quite as depicted here. At the end of the day the US could step in if only to protect the interests of the likes of Goldman Sachs who have dabbled extensively in the region.

    1. Tortoise

      Greek shipping interests will not be affected. Greek ship owners are very shrewd, their money is abroad (mostly in tax havens), and the center of their Business activities is London rather than Piraeus.

  2. Diego Méndez

    “So trying to persuade the average German voter that a rescue of Greece is really in his best interest, because the collateral damage to European banks and the blowback to the real economy would be even more costly, is not a message politicians appear able to deliver successfully.”

    At the end of the day, we’re talking about individuals taking decisions. Greece could have been lent a hand if Merkel wanted; she just didn’t. Maybe because she wants a cheaper euro to enable German exports?

    1. charcad

      Greece could have been lent a hand if Merkel wanted; she just didn’t.

      Not “she”.

      After Germany’s parliamentary elections last fall Merkel & her inner circle reorganized Germany’s governing coalition. Prior to the election Merkel’s Christian Democratic Union (CDU) was in coalition with the Social Democratic Party (SDP). Following the election the SDP was ejected and Guido Westerwelle’s Free Democratic Party (FDP) entered parliamentary coalition with Merkel’s CDU.

      For general information, ideologically the FDP is composed of fans of Mish Shedlock and “Austrian” economics in general. Among the 71% of Germans opposed to “bailout” will be around 99.9% of the FDP.

      Nor does the CDU hold enough seats in the Bundestag parliament to govern alone. The only practical alternatives would be the SDP (again) or to call fresh elections.

      Nor is it clear the CDU would be united in support of a German funded “bailout” even if Merkel attempted to advocate it. The CDU itself is a coalition of the CDU in 15 German staats and the Christian Social Union in #16, Bavaria. However, at the state level in Bavaria the CSU governs in coalition with – surprise! – the FDP.

      It is completely possible – in theory – that Merkel’s government (and Bavaria’s state government) coalition will collapse if she starts talking about German financed “bailout” of any kind. This would be due to FDP withdrawal from the government coalitions. Merkel’s behavior last week at Brussels indicates she deems this a clear and present danger.

      Maybe because she wants a cheaper euro to enable German exports?

      In my opinion she wants to avoid political chaos in Germany. New elections will solve nothing and could easily make things worse. Do you want to bring Germany’s NDP into the Bundestag?

      If so, manipulate a German funded bailout in defiance of the German people’s clearly expressed will.

      Do you want discredit democratic and parliamentary government in Germany? If so, manipulate a bailout.

      Do you want to hand Greek politicians and labor union leaders the power to set the EU’s new standards of fiscal discipline? If so, reward their past behavior with an externally financed bailout.

      1. Diego Méndez

        Germans, as Spaniards or French people, form their own opinions based on what they hear from their leaders. As soon as the German government had said a Greek bailout was unavoidable for Germany’s financial stability, that 70% figure would go down to 20%. I know quite a bit about German politics, and trust me: those words wouldn’t propel Nazis into Parliament.

        Merkel was the only one among 27 leaders to oppose a bail-out. You think Germany is alone in having coalitions, powerful regional governemnts, etc.? Of course they’re not alone, but Merkel was *the only one* to oppose a joint bail-out, with every European country lending money to Greece.

        1. charcad

          You couldn’t get 71% of all Germans to say they like sex or Oktoberfest.

          Diego, if I were Guido Westerwelle and wanted to raise German opposition to bailout still higher to 80% what I’d do is bring you to Germany. And put you on an all-expenses paid speaking tour to lecture the Germans on why they should shovel unlimited amounts of money out to the Greeks, Spaniards and anyone else who appears for nothing in return.

          I hope you at least get paid by someone for your uno-track message: “Give us German money for nothing!” Spanish government? EU Commission? Faction of the ECB?

          1. Diego Méndez

            I don’t want Germany to pay unlimited amounts of money to Spain. I want every European (including me, every Spaniard and every German) to temporarily lend 100 euros to Greece in order to avoid a financial armaggedon (which would cost far more than 100 euros).

            From my personal experience, I know Germans are fairly reasonable. I think they would easily understand this kind of bailout is fair and good for everyone involved, as soon as *someone* explained it to them.

          2. Jacobo

            Diego,

            I lived in Mexico during the early 80’s; my secretary took vacations to Europe until the oil and peso collapsed (another great bubble). Spanish real estate is a sick joke, Madrid hit prices in the NYC range and the overbuilt South will take decades to be absorbed. Unfortunately, the Club Med and Ireland cannot devalue and print. So, the game is over…

          3. Diego Méndez

            Jacobo,

            Spanish real estate is a sick joke. Mexico had a bubble. You lived in Mexico in the 80s. I may agree with all three of them, but I can see how they may be related to this post.

            On the other hand, Madrid has a very high per-capita income (similar to NY), extremely high immigration flows (far more than NY in the last decade) and very low crime levels (unlike NY), so I can’t see why NY house prices would necessarily have to be much higher than Madrid ones.

        2. C

          “Merkel was the only one among 27 leaders to oppose a bail-out. You think Germany is alone in having coalitions, powerful regional governemnts, etc.? Of course they’re not alone, but Merkel was *the only one* to oppose a joint bail-out, with every European country lending money to Greece.”

          Of COURSE she was the only one opposed–everybody else was asking Germany to bear the brunt of the costs!! In effect, Greece is asking for a free lunch, and the other European countries are not only asking Germany to pay for it, but they want their own future lunches to be subsidized as well.

          1. Diego Méndez

            The plan on the table is for European countries to share the costs, e.g. lending 100 euros per capita to Greece or issuing joint eurobonds. In both cases, costs would be shared proportionately to population, which, if anything, benefits Germany.

            The only country needing a bail-out is Greece.

    2. charles

      @diego Mendez:

      You should be interested in this well-informed ‘behind the curtains”report: “El dia que el euro rozo la catastrofe”

  3. allie

    How can a small country like Greece (pop. ~11m) has $350B debt? Are blowing it all on cocaine? jeebus, that’s some serious spending. Did they all buy brand spanking new BMW? They better with that much money.

    totally mind blowing.

    1. Stan

      How did they blow 350 billion? Well accounting for some of that… Greece spends more %GDP on defense than any other EU country – that’s what happens when you’re surrounded by trouble makers. Then there was the Olympic Games, a few years after September 11 – they spent around 1 billion euros on security arrangements there too. And regarding defense spending, check out France the other day trying to get Greece to buy 2 billion dollars worth of Navy frigates – yes just a few days ago when the Greek PM was in Paris. I wonder how much Greece spends catching and deporting on illegal immigrants too – something else which Greece gets the brunt of for the rest of the EU.

      1. Stan

        Also, some of the major infrastructure projects, like the Rio-Antiro bridge (world’s largest cable anchored bridge) was built by European companies (mainly French). All of a sudden it makes sense for the rest of the EU for Greece to go on a spending spree.

  4. MarinusWA

    “So trying to persuade the average German voter that a rescue of Greece is really in his best interest, because the collateral damage to European banks and the blowback to the real economy would be even more costly,”

    The problem with this argument is that it’s ONLY true if the bailout will be successful and disaster will be avoided. If the bailout is done and the entire EU economy still crashes it’s just money wasted on a nation that didn’t deserve it.
    There is an increasing amount of people (including myself) that no longer believe that the current economic ship can be kept afloat. Too much damage has been done (and is still being done) for it to carry on.

    In such a situation it would be better to keep whatever resources you have close to you so you have a better start after the depression hits. Better being relative of course.
    I know this is a rather depressing (ha!) point of view but all over the world I only see lot’s of posturing, empty promises and bankers moving along as they used too. There is still a huge majority of people who believe it’s going to end well but I stopped being one of them.

    1. Phil

      devaluation, part defaulting, part restructuring I guess. Which means get out of euro.

      I mean, what will Goldman do? They have military and can request NATO to launch an attack on their office …(hey, that’s not a bad idea actually. Goldman as NATO security threat?)

  5. When the German voter complains, I’m not sure who he thinks he’s fooling other than himself. He voted for this; he just assumed the scam would always be in his favor.

    (There seems to be no limit to the capacity of voters in rich “countries” like Germany and America to believe in the Big Lies of trickle-down and a-rising-tide-lifts-all-boats, no matter how many times these are proven to be lies.

    True, the German “middle class” was propped up somewhat more securely for a while than the American, but now their liquidation will commence as well.)

    The only reason the power structures of France and Germany set up this “EU” in the first place is because they thought it would provide them with even more exploitation opportunities at the expense of the smaller countries, and eventually of their own people as well.

    As for the public lies, it’s the same as in America. They assumed assets would forever appreciate, marking to market would always mean marking upward, and that no level of anyone’s debt servicing would ever outrun asset appreciation. That’s why no one worried about Greece’s Goldman-assisted profilgacy.

    While reading today’s NYT piece I found myself nodding and saying, “Greece played by the rules”. Including the “cheating” they’re now being accused of. Don’t listen to the scapegoating – Greece did what they did with tacit German approval, because debt was supposed to expand forever while the banks rakes in tremendous tolls.

    And if the crash comes? Disaster capitalism: Bailouts, privatizations, liquidation, expansion of tyranny. It’s set up to be win-win for the criminals. That’s the way it’s playing out so far in America, and now they’ll try the next step in Europe.

    So will German taxpayers prove to be any more capable of shaking free of their delusions and defending themselves than Americans have been so far?

    1. DownSouth

      The NY Times story included a couple of interesting quips. There was this:

      While Wall Street’s handiwork in Europe has received little attention on this side of the Atlantic, it has been sharply criticized in Greece and in magazines like Der Spiegel in Germany.

      There seems to be a lot of scapegoating going on. It’s entirely appropriate that Wall Street should be made to shoulder its share of the blame. But Europeans should not be allowed to project all the blame on Wall Street, as several of the Europhiles who comment here on NC are wont to do.

      For there’s also this from the NY Times piece:

      These kinds of deals have been controversial within government circles for years. As far back as 2000, European finance ministers fiercely debated whether derivative deals used for creative accounting should be disclosed.

      The answer was no.

      Europe also got caught up in the orgy of Libertarian-Austrian-Neoliberal dogma. Rank and file Europeans need to do some serious soul searching and realize they have criminal bankers and politicians in their midst too.

      There was also this from the IMF:

      “If a government wants to cheat, it can cheat,” said Garry Schinasi, a veteran of the International Monetary Fund’s capital markets surveillance unit, which monitors vulnerability in global capital markets.

      Again, this is scapegoating of the worst sort and is what one would expect from the corporate fascists that run the IMF. This projects all the blame on Greece. Greece is surely not without fault here, but without the aid of Wall Street, and without European officialdom’s complicity by gutting rules and regulations, or simply looking the other way, Greece would never have been allowed to get itself into its current predicament. After all, it takes two to tango, something the IMF throughout its long sordid history has always denied.

      1. Yeah, it was that last quote I was thinking of when I cited the accusation of “cheating”.

        As far as my philosophical understanding goes I don’t place all the blame on Wall St (though I might in some or all political contexts; whatever works).

        I simply rank everyone, from bosses to capos to made men among soldiers, to rank and file soldiers, to all the hangers-on, to the lowly victims, and so on, and assign responsibility accordingly.

        According to that ranking, Goldman and the EU/Germany are bosses, while the Greek establishment is pretty far down – a soldier, I guess.

        So if Germany is whining because another boss directly advised one of the EU’s lower level guys on how to secretly run up EU debt (even though the whole point of the EU is to run up debt), I’m inclined to say that should be between the bosses, while the Greek government is small potatoes.

        As for the allegedly spendthrift Greeks in general who are being demonized by the establishment, I doubt much of this binging went to benefit the people as opposed to Greece’s own rich parasite gang, who will now try to socialize the pain after having pocketed the gain. (Just look at all the public revenues having already been promised to Goldman! I’d sure love to see them renounce those “contracts.”)

        And that’s just what Germany will end up trying to do, as it has to take the lead in a new round of Bailouts.

        America, Greece, Germany – the taxpayer is the target, in exactly the same way as the poor of the Global South have previously been the target of globalization. The wave is now engulfing all of us, and we’re to be liquidated and feudalized.

        If we let that happen.

        I look at every national taxpayer base as a potential insurgency. So far the Americans have proven contemptibly craven and docile. So now we look to the Greeks, and soon to the Germans. As Yves foreshadowed above, maybe Europeans might show a little more vigor in the face of their proposed liquidation.

        1. jdmckay

          (even though the whole point of the EU is to run up debt)

          huh?

          As for the allegedly spendthrift Greeks in general who are being demonized by the establishment, I doubt much of this binging went to benefit the people as opposed to Greece’s own rich parasite gang, who will now try to socialize the pain after having pocketed the gain.

          It’s not that simple. Greece has complicity in this debacle, shared amongst prior government and a whole lot of irresponsible social give aways they can’t afford. They have company w/California on this issue.

          (Just look at all the public revenues having already been promised to Goldman! I’d sure love to see them renounce those “contracts.”)

          But I’m glad, at long last, some light is getting shone on the insidious criminality of derivatives, WS style in particular. It’s about time.

          Actually it’s way over due.

          I’m surprised nobody mentioned today’s article on this. There’s more disassembling on this subject

          Funny, seems like it’s taking EU to address the cleaning up of our corporate bankst’a disease.

          1. Doug Terpstra

            DownSouth noted the NYT article earlier, but not so much on Goldman, the vampire squid’s pivotal role in the Greek tragedy—again. They seem to surface wherever disasters strike.

            Papandreou has legitimate gripes about the dastardly role of Wall Street in the crisis, in which Goldman colluded with the former Greek government to hide debt using…wait for it … “derivatives, which are not …disclosed [and] add to the uncertainty over how deep the troubles go in Greece and which other governments might have used similar off-balance sheet accounting.”

            “As in the American subprime crisis and the implosion of the American International Group, financial derivatives played a role in the run-up of Greek debt. Instruments developed by Goldman Sachs, JPMorgan Chase and a wide range of other banks enabled politicians to mask additional borrowing in Greece, Italy and possibly elsewhere. One deal created by Goldman Sachs helped obscure billions in debt from the budget overseers in Brussels.”

            “Wall Street did not create Europe’s debt problem. But bankers enabled Greece and others to borrow beyond their means, in deals that were perfectly legal.”

            I just love that “perfectly legal” bit. When you buy governments, you can make anything perfectly legal—murder, torture, robbery, anything—though it’s still glaring crime to those of us in flyover country.

            In Greece, it seems GS took a page out of Naomi Klein’s book, Shock Doctrine: the Rise of Disaster Capitalism: baited corrupt or stupid officials with easy money with vicious hooks in order to privatize—steal—their future commonwealth.

  6. DownSouth

    I love it!

    The international criminal banking cartel is sandwiched between the people of Germany, who don’t want to bail it out for its past follies, and the people of Greece, who refuse to pay the criminal bankers back their predatory loans.

    Papandreou is absolutely right. According to the FT article, he “blamed the European Commission for failing to crack down on the previous conservative government’s ‘criminal record’ in falsifying statistics. ‘This has undermined the responsibility of the European institutions with international markets,’ he said. “

    Of course the international criminal banking cartel wants to start the clock running today. In that way, it gets to erase the role it played in extending “imprudent” (I think the real term is “criminally negligent”) loans to Greece, as well as its role in persuading EU officialdom to gut the rules that were in place to prevent this very thing from happening. Project all the blame on Greece, make the Greek people walk the plank, and they get off scot free, along with their billions in bonuses they earned with their predatory behavior.

    And of course it’s full court press with the banksters and their little marionettes in the halls of government in northern Europe. They’re going to pull out all the stops in their drive to demonize the Greeks. After all, by pointing the finger at the Greeks, they aim the finger away from themselves.

    So my message to Papandreou is this: Stand tall and proud! Stand strong in the defense of your people! Don’t succumb to the demands of the criminal bankers and their little puppets in the halls of European government. Kirchner showed the way back in 2002. There’s not such a thing as honor anymore. There’s not such a thing as reputation anymore. There’s not such a thing as character anymore. Why should the banksters enjoy a monopoly on immorality? Default on your debts. Declare bankruptcy. Erase your debts and in a year or two they’ll be beating your door down trying to loan you money again. For when the FT said your “outburst is likely to infuriate the very leaders whose help Mr Papandreou needs,” it got it exactly backwards. They need you much more than you need them.

    1. ozajh

      They need you much more than you need them.

      More to the point, they desperately need Greece NOT to default lest Italy/Spain/Portugal (whose debts are much greater than Greece’s) start thinking . . .

    2. dlr

      What Germany does or doesn’t do is irrelevant.

      It a faux crisis. None of the Mega Banks will fail. The Central Bankers have decided to backstop their buddies, come what may, so the whole thing is nothing more than political theatre. The European Central Bank and the Fed are going to keep all of ‘the troubled banks’ afloat regardless of what the politicians do or don’t do.

      They will be out buying Greek debt at 100 cents on the dollar from the charmed circle of banks as soon as Greece defaults. They can store that paper right next to all of the mortgage backed security toxic assets they bought for 100 cents on the dollar from exactly the same crew.

      Or they can just guarantee the bad loans, or provide non-recourse loans at 100 cents on the dollar on all of the bad debt.

      Bernanke’s done all of those things, and more. He’s showed that Central Bankers don’t need to get legislative approval to bail out banks. He bails them out as much as he wants, anytime he wants, and he doesn’t have to get anyone’s permission at all.

      If Germany balks at passing Tarp II, the European Central Bank will start right in using Bernanke’s play book – or rather step up doing the same thing. I’m sure they are already busily doing it right now, paying full price for every bad debt the charmed circle of banks bring it, and all the rest.

      The only thing is I’m not quite sure how it will end. What happens when the Central Banks have sucked up all of the bad debt onto their balance sheets?

      1. Aha

        devalue euro against dollar and yen. Print more euro.

        It’s just paper money. China is not going to be able to keep buying dollar and euro at the same time.

        On the other hand US economy will die. can’t compete with european price.

  7. ZA

    Much less convince the US voter whose congressman voted for $108b in IMF funding this year. Oh, the IMF is *really* not an option.

    Hell, they’re going to kick and scream against rescuing California, especially when the pensioner figures are politicized.

  8. Chris

    As a matter of fact around 20% of Greece’s debt is held by UK institutions, not chump change, though even chumps change.

    Additionally, in the real world of “Slicing and dicing” where debts do not all come due at once, the upcoming, April-May “nut” is presently around 20 billion Euros.

    Again, Germany’s reservations about being on the hook for non-Euro area debt incurred in strange ways also seem quite understandable.

    In the Euro area, it may be that a combination of austerity in Greece, financial aid, and opening of other European countries (Germany) to exports from Greece (it is on the route of one of the pipelines from Turkey)would be viable, if combined with serious efforts to end the conceptual and financial tyranny of credit default swaps as forms of speculation against the existence of countries where real people live.

    A cooler view than EP’s, and much of the counter-factual matter that is found in the US can be found here

  9. charcad

    Yves here..the problem not just the prospective extension of credit, but all the debt from these countries and their banks now sitting on the books of institutions in France, Germany, Switzerland, and Holland.

    Surely Papandreou and his government are not the only possible broker-dealers for bailing out European banks further north? They have to be the highest commission operation around.

    The example of Volker and the Latin American debt crisis is instructive. No one then thought that solutions had to be channeled through Latin American capitals and banks.

  10. Ketchup Sandy

    NEW YORK, Feb 9 (Reuters) – U.S. banks have $176 billion in exposure to Greece, Ireland, Portugal and Spain, with risks concentrated among the 10 largest U.S. banks, Barclays Capital said on Tuesday.

    [snip]

    The FFIEC data shows that 10 U.S. banks — Bank of America (BAC.N), Citigroup (C.N), JPMorgan, Wells Fargo (WFC.N), Bank of New York (BK.N), State Street (STT.N), Goldman Sachs (GS.N), Morgan Stanley (MS.N) and the U.S. branches of Deutsche Bank (DBKGn.DE) and HSBC (HSBA.L) — hold 96 percent of the risk, Barclays said.

  11. Steve Waddell

    Although the PIIGS are creating a great crisis for Europe that must be addressed in the short-term, at least there are some people in Europe who are forging ahead with the type of longer-term large system change strategy that is lacking globally and in the US. The EU just closed responses to a Call for a 10 million euro, 3-5 yr project for “changing the role of the financial system to better serve economic, social and environmental objectives”. For more go to

  12. Tortoise

    A couple of comments. Yves says: “a Greek default would push the European banks over the edge.” I sincerely doubt it that this will be the case for a number of reasons. Governments or the ECB may provide liquidity and regulators may turn a blind eye (reference to the issue of mark to market of other sovereign debt) and give banks some time to recover. Some banks will suffer losses but nothing like pushing “the European banks over the edge.” The Greek government is likely to reschedule payments rather than walk away from all its debts. So, losses will be a certain number of cents on the euro.

    Greece needs to get its house in order before receiving ANY help from its partners. The revenue service employees should get off their collective asses and start collecting overdue taxes instead of spending half the critical month of February on strike, as they have already announced! Enough of Greece. Instead, the powers that be in Europe should realize that about a dozen countries in the eurozone or its periphery are in much trouble and, hence, that some crucial corrections are in order for THE WHOLE REGION.

  13. C

    Yves says: “a Greek default would push the European banks over the edge.”

    And a non-default will also push Europe over the edge, because a guarantee for Greek debt suddenly means that Greece is more credit-worthy than Spain and Portugal, causing spreads to widen there. And nobody in Euroland can guarantee Spain and Portugal’s debt.

    Incidentally, nobody has brought up the effects of changing the “stability” pact to the “stability and growth” pact earlier this decade. That too is going to have neormous repercussions…

    1. Troy

      I don’t understand this.

      What if everybody in club med says: OK everybody. We are off to the beach. We don’t deal with the debt. Ciao.

      What exactly gonna happen? US invading greece? Germany not going to bail out their own bank and save euro?

      If I were in club med, the choice is pretty obvious. Walk out and have a good time at the beach.

      1. dlr

        That’s certainly what I would do if I were Greece. All of their EXTERNAL debt anyway. Wouldn’t want to piss off any voters stupid enough to have bought some. The bankers will be over there making them new loan offers by the end of the week. Why not? What have they got to lose? The Fed and the European Central Bank will step up and buy all of the bad defaulted debt from them for 100 cents on the dollars.

      2. C

        JMO, but I don’t think that it’s the threat of invasion that forces countries to pay off their debts (the rare times that they do without issuing new ones, anyway).

        Nobody will lend them $ in the future. So no imports except for on, basically, a barter system. No oil or NG imports. No machinery imports. Nobody able to retire. All savings wiped out (you don’t really think other countries will let Greece wipe out their debts without freezing their assets, do you?)

        etc.

        A few weeks (months?) after all this,S&P will also likely downgrade their debt rating ;o)

        And, as Yves has posted, if *nobody* covers Greece’s debts, there will be a run on international banks.

  14. C

    Incidentally, has anyone considered what would happen to the Euro if China decided to revalue right now? Any insights?

    (my guess is outright disaster to Euroland, but maybe I’m off on this one)

  15. Tortoise

    Regarding Greece, I think the commenters have a very vivid imagination — I hear of bankruptcy, military interventions, freezing of assets, embargoes.

    Come on people, get a grip. Stop reading English newspapers, they do not know what they are talking about on a number of topics, including Greece. The end of the world does not draw nigh.

    Greece has its problems but consider just this: The value of commercial and residential (not agricultural or pastures) real estate is estimated to be somewhere between 3 and 6 trillion euros (trillion, with a T). (Not based on government statistics. The government could evaluate this number based on a form, E9, that everyone in Greece must fill with their tax return. For some reason, the government does not want to do that.) If a real estate tax of 1%, which is common in the US, were collected, that would bring 30 to 60 billions of revenue, more that enough to cover the annual deficit. Who owns this real estate? Perhaps 80 Greek residents, the rest nonresidents. Do the Greeks have the cash to pay so much money? Γιου βετ! Checking and savings accounts of Greek households and companies in Greece was over 190 billion euros as of last November. Of course, property is currently very overvalued and will depreciate (particularly if taxes go up) but I think you get the idea. To be sure, Greece has a lot of problems but bancrupcy is not inescapable — although renegotiation of sovereign debt may be a politically reasonable option. It would take a lot of blunders to lead to a complete disaster — but when I see the global hysteria and panic, I am reminded that the human race has often proved capable of that.

  16. Swedish Lex

    DownSouth may be getting his Greece vs. the rest “High Noon” moment faster than we think:

    If you run a 14% deficit (up from 9 or so in the space of a few weeks because of fudging the numbers), it is a bit rich to say that we will not introduce the austerity measures that your helpers suggest you do, not just right now anyway. Comments from Greek officials that ““It makes no sense to rush into additional measures until they are seen to be necessary,” said a senior Greek official.” will in my view not exactly increase the perception that Greece deserves full confidence of the financial markets, not just right now, anyway.

  17. Swedish Lex

    I posted a longer comment that seems to have disappeared. Here is an interview with a German ECB Board Member that I had included in the comment:

  18. Good luck doubling exports in 5 years, President Obama

    German exporters are not displeased with the Euro’s slide.

  19. tz

    I thought “greeks” would get options pricing right.

    This makes for great theater, save for the wee complicating factor that we all have a stake in the outcome.

    From zombies to vampires. That is the problem – as long as these undead institutions are left to roam, they will suck the life blood out of anything healthy. By all means put a stake in it.

    The Euro cannot hold together – it is not so much sovereignty per se, as it is a more fundamental divergence. The USA has California and Nebraska, and they will not have the same economic conditions except as a coincidence. The Soviet Union had neither sovereignty nor democracy, but had trade (and you can extend that to their satellites) and it collapsed – economically. Something like a gold standard will simply make the divergences more visible.

    Now it is more “complex”, but that only means the choice is between bailing out Greece or a bunch of big banks. Or letting both fail in such a way that those who acted stupidly end up at the soup kitchen, but limit harm to bystanders (we are all darwinists now, aren’t we? Even if we aren’t is there no economic justice to be had?).

    (In the case of the US, For anyone needing a bailout I would have offered the choice to the top 25 or so officers at each firm the boards, A. resign in then next 72 hours and return the last 3-5 years of bonuses, any based on the toxic swaps, and leave with whatever retirement you were promised, or B. the SEC, IRS, and FBI will open a tax and fraud investigation and go through every transaction over the same period and either you will be found clean or guilty beyond a reasonable doubt and end up in Marion Illinois, then search for some less corrupt managers).

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