What a Greek Default Looks Like

Andrew Lilico outlines the collapse:

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.

There's more, all of it depressing.

The most compelling argument against my belief that the euro can't last is simply that it's so . . . damn . . . hard to get out.  The country that does it will suffer immensely.

On the other hand, people do snap their currency pegs when they're already suffering a great deal.  And while the PIIGS are suffering now, that's nothing compared to what will happen if their economies stay in the slough of despond, and the governments and central banks of more solvent countries run out of money and/or patience to continue the subsidies they're now receiving.  

I've only been writing about finance for seven years, and I've already watched a bunch of "unthinkable' and "impossible" actions, from Argentina's devaluation and serial defaults, to my own government nationalizing GM.  The unthinkable gets thunk surprisingly often.
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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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