[Closed] Armchair economists - What would actaully happen if Greece defaulted on its debt

It's part of the Euro, and any failure by Greece would lead to a pretty much immediate downgrade of the other PIIGS, though clearly they're not in the same level of poo as Greece. So then you've got a split Euro zone, which means the Euro itself might well come under real pressure as an economic instrument.

So yeah, pretty serious

It's looking inevitable. Anyone know what the rioters are proposing the government do ?

Thanks Nick. That's what I was driving at. Could Greece (and maybe Portugal and Ireland) dropping out of the Euro not have the same effect for their economies as Britain dropping out of the ERM. ie: positive?

Which economies would be likely to be clobbered hardest if that happened? I take it Germany and France would take the biggets hit? How would it effect us outside the Eurozone?

EDIT: sorry for all the questions

I heard/read the Germans have been printing deutchmarcks(sp) in preparation for the Euro collapse. can't remember where I saw it though.

Can't say I know the answer but I was wondering the same whilst watching the news. Apparently the colapse of Lehman Brothers triggered the dominos that ended us up in the current mess we are in. If that was a bank, then the potential for an entire country to go bankrupt has got to have wide felt effects.

That said I have no concept of the scale of their austerity measures - 1/10th of GDP, what does that actually mean? I heard they are having a fire sale of public assets? How does that compare to our current round of cuts in the uk?

I don't think the Euro is long for this world. Germany is basically propping the whole thing up, and it can't be long before they say enough is enough I reckon 😕

[url= http://www.northerntrust.com/pws/jsp/display2.jsp?XML=pages/nt/0601/1138283678319_6.xml&TYPE=interior&er=dgcDetail&c=primary/resource/1005/1273775941043_858.xml ]Here is an artcle to get you started[/url]

I think if they all hide inside a huge wooden horse and pretend to have gone home,it'll be fine. It's worked for them previously.

The problem for the Germans and French is that they're propping up the Euro. Those lending to the Greeks are betting that this support will continue, so they're prepared to lend at credit-card rates (28% for 2-year Greek government bonds!). The German/French governments can't pull out - it'll destroy the Euro - but if they don't then they're going to have to keep funding Greece with ever more money, thus devaluing their own economies, and the Euro as a whole.

They'll not let Greece fail though - the Euro was never driven by economics, always by post-war politics.

They'll not let Greece fail though - the Euro was never driven by economics, always by post-war politics.

Indeed. As Woody points out, the Euro's in a lot of trouble. Germany and France can ill afford to keep propping it up, but I doubt the printing of Deutschmarks (spl?) above.

Gov bonds are held by, Banks, funds of various types and other countries etc. They receive the interest payments quarterly but also the bonds will have an expiry date where the capital must be repaid to the bond holder by the Gov and this is done by issuing more Bonds (rolling over the debt).

If it defaults then the bond terms are effectively abandoned and it is likely that it is the repayment of capital to the holder that will not be received as it can't issue new Bonds. The structure of repaying the debt then needs to be negotiated but as the country has effectively failed to meet its obligations it is not really a negotiation but a one sided offer by the government to repay on terms that it thinks it can afford.

The impact of the above mess is the gov/country is not able to raise any finance on bond markets while this is ongoing i.e. Greece debt was trading at 27% yesterday and if the gov tried to issue new debt that is what it would need to pay in interest – which is unaffordable / unworkable. This is where the pressure then transfers to the currency / wider EU as the EU / IMF will have to take on the role as lender if it needs to be bailed out.

The other impact is obviously bad news for the bond holders who are in a very weak position.

Thanks for the answers. Its interesting stuff. So what kind of sums are we talking about being in circulation in Greek bonds? They must be effing huge if the EU is on about bunging another 100 billion at it to stop the problem.

Thinking out loud: Or... If Greece defaults would there be a possibility that others would follow suit? Is that the problem? I'm still struggling to see how a country the size of Greece could hold enough debt to cause huge-scale damage to the world economy

Oh... and 😆 at tadeuszkrieger

According that article I linked about EUR 100 billion so EUR 100 million would be 0.1% of that amount.

just reading it now Mefty. Thanks

Total Greek debt is closer to $330bn

puts my overdraft in perspective 😀

One of the major issues is the fact gov bonds trade on counterparty strength ie they are seen as a good investment because governments allways pay. Defaluts on soverign debt are very rare (argentina was once of the last to do something similar). The propspect of a europen soverign default will taint all soverign debt especially the ones similar to Greece (the PIGS). This is bad news for governments that borrow lots of money luckly we are....oh.

What would happen? In the real world not much. Food would still get grown, rain would still fall.

No chance at all of the Euro failing - this is the vain hope of some.

Iceland defaulted did it not?

Icelands default seems to be working for them... Is that just an economy of scale matter though??

Yes Iceland defaulted i was thinking pre crisis. Argentina did ok to in the end.

On the phone so I haven't read everything, but that's never stopped me before. I would assume a couintry will not be allowed to go bankrupt, so in the long term, no problem.
Spain isn't too far behind, I had las week that a level of govt is trying to pay its debts using land!
Time to call it a day on the Euro and allow individual govt to sort it out. The single currency does not mean that there is a single fiscal policy and this is the main problem in the Eurozone. IMO, of course, I,ll let a more learned one correct me.

Sovereign debt is about the number I quoted that is what would be subject to default. When people talk about the Euro failing they are talking about countries leaving it and to suggest this is impossible to pie in the sky. If the Greek people refuse austerity and the European (notably German) governments are unwilling to provide further funds, something has to give and leaving the Euro (maybe temporarily) would be a solution.

Totally agree about the break up of the Euro, something that should happen sooner rather than later. A growing economy like Germany that needs an interest rate rise to curb inflation is NOT going to help a struggling country like Spain. Unless another solution can be found.

Re countries going bankrupt. Government bonds are unsecured debt so the bond holders in real world terms have little option but to accept any terms offered.

Terms are offered to clear the debt because all countries will ultimately want to get in to a position to borrower money again from the markets (as we know governments like borrowing money).

Icelands default seems to be working for them... Is that just an economy of scale matter though??

Depends on your definition of 'working for them' really. Average disposable income has fallen by 20%, and unemployment is around 10% (almost zero before the collapse). You can argue that this is a price that has to be paid, but Iceland was a rich economy before - people, generally, could afford to take a hit - whereas Greece is definitely not in that position, nor has it ever been.

The Euro won't fail, and Greece - technically, at least - will not default, but it's going to be horrible there for a very long time to come.

They'll not let Greece fail though

They already have. The EU sends shed loads of taxpayers money to Greece, which is then returned, plus massive interest, to the banks. The international finance system is working just like always - to take from the poor and give to the rich.

In Greece there is a real sense of hopelessness, as the "austerity measures" just drain the country of any stimulus it needs to get the economy moving again.

First Strauss-Kahn f*cks Greece, then he f*cks the maid.

Wasnt the other option for Iceland saddling it's taxpayers with the massive debt for decades? I quite like the Icelanders 'UP YOURS' to the markets actually.

Holders of Greek Government Bonds and debt, in billion EUR
Greek Banks 56
Other European Banks 50
ECB (direct holdings, nominal value) 50
Central Bank of Greece 10
Greek Social securities/other government 30
Other Investors 120
Total Government Bonds 260
+ EU/IMF loans already disbursed 53
Total debt 310

Source: BIS

I used the $ rather than € in my previous post - rather a different sum, though frankly at this level it's all just numbers.

Yes but debt held by Greek banks, Central Bank of Greece etc is not sovereign debt so you are looking at 100 being ECB and Eurpean banks (but some other odds & sods) I am not sure whether EU/IMF loans are defined as sovereign debt - they may be, in which case the figure in the article is a bit low presumably because these have been used to repay domestic investors.

Edit: if yours are USD numbers then EU/IMF debt included as USD level is 130 and the difference is probably exchange rate movement.

I quite like the Icelanders 'UP YOURS' to the markets actually.

Its not that simple as whilst its easy to think that Banks and hedge funds can just take a hit the money in Banks and hedge funds is ultimately ours as is the IMF and other EU money that comes from our tax.

This is where it will ultimately go – something like a settlement to repay a % of the debt over a long period and resulting in write offs by the lenders (which is bad news for us).

I think my previous post was rubbish I leapt to an incorrect conclusion to reconcile numbers, actually the potential default is in respect of debt needing rolling over in the near future hence not all debt is in point.

The greek economy will jump ship to Bitcoin and they will all live happily ever after. 😉

To the folk who think the euro is in such trouble - why is it highly valued? Mch higher than the £ right now and doing well against the dollar IIRC. Wehre would you rather have your money? £ Euro? Dollar? Yen?

No matter how some folk want the Euro to fail its one of the if not the strongest currency in the world backed by huge wealth

What would happen? In the real world not much. Food would still get grown, rain would still fall.

Do you have a pension? What is it invested in?

It's not bad news if you can grow your own food and live on rainwater, I suppose...and aren't in the Eurozone...

TJ's in the 'arc of prosperity' 😉

To the folk who think the euro is in such trouble - why is it highly valued? Mch higher than the £ right now and doing well against the dollar IIRC.

The eurozone isn't/can't do this to the same extent. So the countries with lots of debt are stuck with it.

So the euro is in big trouble but all other currencies are worse? 🙄

Well, no, you seem to have missed the point of why countries devalue their currency.

No 5th - I understand that - not that anyone has deliberately devalued that I know of.

However people keep claiming ( not just on here) that the euro is in big trouble - if so why is it such a desirable currency to hold as can be seen by its high value that is remaining high? Usually when a currency is in trouble or an economy there is downward pressure on it.

if teh currency really was in trouble surely there would be downward pressure on its value as speculators ran to the dollar £ or Yen?

To me it smacks of wishful thinking from people who want the euro to fail. Its simply too big and backed by too much wealth.

In todays FT

Berlin has been insisting that it include measures to coerce Greek bondholders to accept new, longer-maturing bonds that would not have to be repaid for seven years.

No 5th - I understand that - not that anyone has deliberately devalued that I know of.

That is not the same thing as a devaluation. It may result in downward pressure on the currency but it is not a devaluation as I understand it.

That is not the same thing as a devaluation

yes it is. We did it and so did the Americans. A lot of people were very unhappy about the Americans doing it, particularly the Chinese, as they hold currency reserves in dollars that are now worth a lot less

Devaluation is a reduction in the value of a currency with respect to those goods, services or other monetary units with which that currency can be exchanged.

In common modern usage, [b]it specifically implies an official lowering of the value of a country's currency within a fixed exchange rate system,[/b] by which the monetary authority formally sets a new fixed rate with respect to a foreign reference currency. [b]In contrast, depreciation is used for the unofficial decrease in the exchange rate in a floating exchange rate system[/b]. The opposite of devaluation is called revaluation.

[b]Depreciation and devaluation are sometimes incorrectly used interchangeably[/b], but they always refer to values in terms of other currencies. Inflation, on the other hand, refers to the value of the currency in goods and services (related to its purchasing power). Altering the face value of a currency without reducing its exchange rate is a redenomination, not a devaluation or revaluation.

http://en.wikipedia.org/wiki/Devaluation

Yes its good old wiki