What would actually happen if Greek defaults?

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joanne's picture
joanne
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What would actually happen if Greek defaults?

What would happen if Greek would actually default?  Sorry if this appears to be a silly question..but who exactly are they defaulting on???  Are they defaulting on a particular bank OR banks?  And if so, which banks??  And if they default, are the banks strong enough to handle the loss? If they are not strong enough, then I believe that the banks in Europe have insurance for their depositers to cover a certain amount of money.  So as long as the depositers keep less than that amount in their accounts, they won't personally get hurt. (as long as they know which bank is going to go bankrupt so they can move their funds) 

So, if what I am assuming is correct, then why doesn't Greek just default??  Countries have defaulted before, and had a tough time for a year or so, and then grew stronger than before afterwards.  Am I missing something here?  Can anyone clear this up for me please?

 

fiorgodx's picture
fiorgodx
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Posts: 22
 This is a good question,

 This is a good question, here's a post about the Greek debt and who holds it:

http://www.greekdefaultwatch.com/2011/04/who-holds-greek-debt.html

Figured I'd post rather than summarize. I'm no expert but if Greece defaulted I assume the EU in general would suffer as well as the Euro.

Farmer Brown's picture
Farmer Brown
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Posts: 1503
joanne wrote: What would
joanne wrote:

What would happen if Greek would actually default?  Sorry if this appears to be a silly question..but who exactly are they defaulting on???  Are they defaulting on a particular bank OR banks?  And if so, which banks??  And if they default, are the banks strong enough to handle the loss? If they are not strong enough, then I believe that the banks in Europe have insurance for their depositers to cover a certain amount of money.  So as long as the depositers keep less than that amount in their accounts, they won't personally get hurt. (as long as they know which bank is going to go bankrupt so they can move their funds) 

So, if what I am assuming is correct, then why doesn't Greek just default??  Countries have defaulted before, and had a tough time for a year or so, and then grew stronger than before afterwards.  Am I missing something here?  Can anyone clear this up for me please.

I believe the real world will answer your question within a very short period of time, because Greece will be defaulting.  My personal prediction is before the end of this week, but I suppose they can keep this dead man walking a month or so more if they get creative enough.

In the meantime, my own personal opinion is that it will be much better for the Greek people if they default, both in the long term and medium term.  Things will be very difficult short term whether they default or not.  Look at Iceland:  they defaulted and so far they have not drifted under the arctic ice. 

As for the rest of Europe, things may not be so good if Greece defaults because many European banks are holding Greek debt, and those banks are so highly leveraged, that even a small loss will wipe out their equity.  As for depositor's insurance, there is no such thing, even in the US, so I wouldn't count on that.  FDIC insurance is a myth that only works when a bank goes bad in good times.  It does not work when a bank goes bad in bad times because in bad times, when one bank goes bad, it takes a slew of others down with it.  Read up on the FDIC.  You will find it does not have the resources to pay but a paltry amount on the deposits it claims to insure. 

There is a reason why Europe has made an embarrassment out of itself, its currency, its currency union, and its central bank, all in the name of saving Greece, and that reason is because it is not and never has been about Greece.  It is about saving the banks that hold Greek debt. 

So turn the question around:  How big and bad of a problem does the prospect of Greek default have to be for its debt holders to exert enough pressure on Europe's monetary authorities to do everything they have done so far (which by the way has not worked and only made matters worse)? 

Pretty big and bad, is my conclusion. 

 

Travlin's picture
Travlin
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Joined: Apr 15 2010
Posts: 1322
Excellent
Farmer Brown wrote:

There is a reason why Europe has made an embarrassment out of itself, its currency, its currency union, and its central bank, all in the name of saving Greece, and that reason is because it is not and never has been about Greece.  It is about saving the banks that hold Greek debt. 

So turn the question around:  How big and bad of a problem does the prospect of Greek default have to be for its debt holders to exert enough pressure on Europe's monetary authorities to do everything they have done so far (which by the way has not worked and only made matters worse)? 

Pretty big and bad, is my conclusion. 

Farmer Brown

Your logic is impeccable.

Travlin 

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