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(snip)When it comes to the topic of Greece, by now everyone is sick of prevaricating European politicians who even they admit are lying openly to the media, and tired of conflicted investment banks trying to make the situation appear more palatable if only they dress it in some verbally appropriate if totally ridiculous phrase (which just so happens contracts to SLiME). The truth is Greece will fold like a lawn chair: whether it's tomorrow (which would be smartest for everyone involved) or in 1 years, when the bailout money runs out, is irrelevant. The question then is what will happen after the threshold of nevernever land is finally breached, and Kickthecandowntheroad world once again reverts to the ugly confines of reality. Luckily, the Telegraph's Andrew Lilico presents what is arguably the most realistic list of the consequences of crossing the senior bondholder Styx compiled to date.
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…(snip)
For whatever reason, Americans, Canadians, Aussies etc. seem to pay very little attention to the huge debt problems now coming to a head in Europe. However, the 'collateral damage' of a Greek default will NOT remain limited to Greece or the EU
from
(snip)" I think there would be a number of knock-on effects from this event that could have a real impact on U.S. investors. Here are a few:
Contagion
Greece is not a large economic power nor a large market for most U.S. firms, so its failure would not in and of itself make a big splash. The biggest threat is the pressure it will put on other struggling European economies. Ireland and Portugal have already received assistance, and a Greek default would shine a bright spotlight on those countries. The market would wonder if they were also on the verge of default, and the spiral of rumors that forced Greece to capitulate could overcome these two countries, as well. If the pressure reached Spain or even Italy, the consequences would be even worse. These are much larger economies, and their default would send shockwaves across the entire financial world.
Bad for Banks
European banks would be some of the hardest-hit institutions by a default. They hold a fair amount of government debt, and many are still trying to recover from the financial crisis. And as we learned in the financial crisis, the banking system is extremely interconnected. Failures of banks in Europe will affect the global banking system and put even more stress on a sector that has seen its fair share during the last few years. Mass defaults of European sovereign debt will be a big test to see if the improved capital levels are enough to stabilize the banking system or if more bailouts will be needed. I imagine that one of the major factors that might force Europe to attempt to work out an agreement with Greece is to try staving off a bank bailout later.
Even Slower Growth in Europe
It is hard to imagine how a Greek default or exit from the eurozone would be good for European growth rates. The recovery in Europe has already been sluggish compared with Asia and the Americas, and the added uncertainty of a major shock isn't going to do anything to attract investment and get consumers spending again. A default would also likely force even the more sound countries to accelerate their austerity plans. That contractional fiscal policy will be a drag on growth. Finally, if the banks do get in trouble, the drying up of credit will also have a negative impact.
Europe as a whole is an important market for U.S. firms. And for the global economy to really get back on track and expand, Europe needs to come along for the ride.
Flight to the Dollar
A crisis in the eurozone would further cement the U.S. dollar as the global reserve currency. Large investors looking to keep cash safe will move from euro-denominated deposits to dollars, strengthening the dollar versus the euro. A stronger dollar will have myriad effects on the U.S. economy. On the downside, manufacturers and other firms trying to sell goods abroad will suddenly find that their products are more expensive on the global market. Creating headwinds on exports and manufacturing will hurt what has been a key driver of the recovery. On the upside, U.S. consumers' purchasing power will increase. Furthermore, if the crisis reaffirms the dollar's role as the reserve currency, it will make it easier for the U.S. government to continue to finance its deficit.
Eastern European Effects
This might be a longer-term impact, but an extended European crisis will reduce the potential of emerging Eastern European economies. One of the biggest successes of the EU has been enticing former Eastern Bloc countries to liberalize their economic and political processes in order to gain access to the EU and the euro. However, if there's only a small chance that these countries could ever join the common economic area, it might reduce their incentives to modernize their economies.(snip)
as well as
(snip)WASHINGTON (AP) -- The stock market's slump this week reflects a widespread concern among many economists that the European debt crisis could slow the U.S. economic recovery.
Few expect the problems in Greece and other European nations such as Portugal and Spain to drag the United States back into recession. But the crisis has increased the uncertainty facing U.S. business leaders.
"The perception of risk has just changed in a major way," said Mark Vitner, senior economist at Wells Fargo Securities. "Business leaders now think there is more risk in the world economy than they did 30 days ago."
A weaker European economy could reduce demand for U.S. exports, as European consumers cut back their purchases of autos, appliances and other goods.
And as the euro declines in value compared to the dollar, U.S. goods become more expensive in the 16 countries that use the European currency.
"There is some negative effect on the U.S. economy, no doubt," said Michael Mussa, senior fellow at the Peterson Institute for International Economics."(snip)
If the 'usual suspects' cause markets to react in the 'usual way', an official Greek default will probably send US stock markets down ... will send the US dollar up ... which in turn will send precious metals and other commodities down.
The actual bigger worry is the potential for a second 'Lehman Brothers' systemic liquidity crisis ... the consequences of which is impossible to assess since the exposure of US / Canadian / Australian banks to Greek / Irish / Portuguese gov't debt as well as the exposure of US / Canadian / Australian companies to the EU export market, is impossible to quantify.



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