What Happens When Greece Defaults?

vivatifosi

worldtraveller wrote: »

However, my guess is that the EU may well impose restrictions on the movement of capital in the future to reduce such inherent risk to the ECB.

But wouldn't that be against a founding principle of the EU - ie freedom of movement of capital?

Article I-4 of the Constitution guarantees the free movement of persons, goods, services and capital within the Union (the famous "four freedoms") and strictly prohibits any discrimination on grounds of nationality.

http://europa.eu/scadplus/constitution/objectives_en.htm#PRINCIPLES

tomterm8

Are there any examples of a single currency area with internal capital controls? Can't imagine it would work.

worldtraveller

vivatifosi wrote: »

But wouldn't that be against a founding principle of the EU - ie freedom of movement of capital?

Article I-4 of the Constitution guarantees the free movement of persons, goods, services and capital within the Union (the famous "four freedoms") and strictly prohibits any discrimination on grounds of nationality.

http://europa.eu/scadplus/constitution/objectives_en.htm#PRINCIPLES

Good point. It may well be, but, at the same time, it wouldn't surprise me (and I honestly have no idea on this without reading the whole thing), there may well be grounds where it may be possible under exceptional circumstances. There are of course often grounds for differing interpretations of many laws. It'll be interesting to see how they handle such capital flows though, particularly if Greece looks certain to default and the whole situation gets significantly worse, extending to other countries then likely to do the same.

ninky_2

How much does the average Greek have in cash debt compared to cash assets? In terms of paper wealth a devaluation of fiat currency could certainly advantage some people although the wider social consequences could be less pleasant.

Poshbird

ninky wrote: »

How much does the average Greek have in cash debt compared to cash assets? In terms of paper wealth a devaluation of fiat currency could certainly advantage some people although the wider social consequences could be less pleasant.

Yeah advantages like cheap hols for us brits. You could hire a luxury boat to cruise the islands off Greece for few hundred quid. Each meal will be about one pound including drinks

cosmica76

I don´t agree with your second point "The Greek government will nationalise every bank in Greece". She´ll haven´t to nationalise it. Probably there could be bigger governmental control. Basically private banks will lost their money, but not own identity. I assume the process of devaluation of the previous Greece currency is more better possibility as something like "financial eurowall". This solution is increasing a "ballon" with next problems in Europe.

Generali

ninky wrote: »

How much does the average Greek have in cash debt compared to cash assets? In terms of paper wealth a devaluation of fiat currency could certainly advantage some people although the wider social consequences could be less pleasant.

For the bank system as a whole, assets > liabilities in banking rather than accounting terms. This is because banks have to keep assets in reserve. (In accounting terms assets = liabilities by definition).

FWIW, Alpha Bank claims to be the best capitalized Greek bank excluding Government debt on their books. Government debt = 80-100% of reserves most likely.

As the financial system is net long assets, a devaluation reduces the value of those assets.

In terms of social consequences, it is very hard to run a Government without debt. The reason? Taxes come in lumps whereas expenditure goes out steadily. The Greeks wouldn't just have to balance their books, they'd also have to get ahead of themselves unless they can convince the IMF to give them more money.

Mr_Mumble

Andrew Lilico is going to be awesome for bear !!!!!!, consider his latest:

Belarus vs Greece

As of May 10, Belarus and Greece had the same credit rating. Less than a fortnight later, on May 23, Belarus devalued its currency overnight by around 55 per cent. The people of Belarus are now sweeping supermarket shelves clean and queuing outside currency exchanges.

Meanwhile, the IMF says it won’t give Greece its next tranche of funds unless the EU guarantees to finance Greece into 2012, but the Eurogroup president today said that Germany and Finland won’t accept that. A “Senior Western diplomat” has been quoted by Reuters as saying that the US regards a Greek restructuring as “100 per cent unavoidable”.

STing

What happens when Greece defaults. Here are a few things:
More a currency swap than an out an out default?

- Every bank in Greece will instantly go insolvent.
How so? Are liabilities and assets in different currencies?

- The Greek government will nationalise every bank in Greece.
As above.

- The Greek government will forbid withdrawals from Greek banks.
They might temporarily limit withdrawals. Money is needed as a medium for exchanging goods &services.

- 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.
[continues]
About time.

As a Schengen zone & freedom of movement EU member; will mass migration follow?

Generali

STing wrote: »

Every bank in Greece will instantly go insolvent.
How so? Are liabilities and assets in different currencies?

Because a large part of the assets of the Greek Banks are held in Greek Government bonds for example Alpha Bank, which is apparently the best capitalised Greek bank, holds somewhere between 80-100% of reserves in Greek Government bonds. If the Greek Government decides to reduce the face value of its debt by half which is what the market is pricing in, the Greek banks are insolvent as they lose such a large proportion of their reserves.

STing wrote: »

As a Schengen zone & freedom of movement EU member; will mass migration follow?

It seems likely. That doesn't mean it will happen though.

I didn't write the piece and I don't necessarily agree with it but it is food for thought. For example, some sort of deal could be done prior to default where the Greek banks enter into a swap deal to swap their bonds for cash with the ECB taking part of the hit on the fall in the value of the debt.

There are many ways to mitigate the impact of default on Greece although it doesn't mean they will happen. I suspect that the voters of the rest of the Eurozone will be quite happy to leave Greece to her own fate. That certainly seems to be the way the wind is blowing in Europe these days.