What Happens When Greece Defaults?

AndyGuil

Rather than Greece borrowing more they should default to save the rest. It may require Portugal to do the same but the other countries especially Germany are productive and will keep going and the Euro will be stronger as a result.

sabretoothtigger

^^ Thats the idea they dont like because it goes against the whole unity thing behind the Euro.
Every economic decision is based on politics and saving face even though Greece lied to get into the euro.

julieq

Greek defaulting has more of a symbolic significance than anything else, but it's going to put the lie to the socialist mythology that there's a big brother sitting over the hedge waiting to pick up the tab for excessive public spending. And in that it may have a beneficial effect because what they will go through will make the levels of cuts here look like small beer. Financing a deficit without access to debt is going to bring in more austerity than austerity programmes were ever going to, and I suspect other countries will see that and take note.

I don't think anyone seriously expects Greece not to default incidentally.

vivatifosi

Just saw a headline from tomorrow's FT on a newspaper review. Said that the Greek government will be forced to allow international involvement in its taxation system under the bailout. A further article in the FT states that there is a big fall out between the IMF and EU and if it isn't sorted out, Greece will default in July:

http://www.ft.com/cms/s/0/cf7b10b8-8a25-11e0-beff-00144feab49a.html#axzz1NmMzJ8qp

I used my last FT credit up looking this up so hopefully link matches at least part of what I've typed!

michaels

Presumably the same goes for Eire and their cherished corporation tax rate...in the short term if the Irisdh had to increase this it would be good news for the UK.

Generali

vivatifosi wrote: »

Just saw a headline from tomorrow's FT on a newspaper review. Said that the Greek government will be forced to allow international involvement in its taxation system under the bailout. A further article in the FT states that there is a big fall out between the IMF and EU and if it isn't sorted out, Greece will default in July:

http://www.ft.com/cms/s/0/cf7b10b8-8a25-11e0-beff-00144feab49a.html#axzz1NmMzJ8qp

I used my last FT credit up looking this up so hopefully link matches at least part of what I've typed!

This is the most interesting part of the article for me (and for those that don't have an FT subscription!):

Until recently the EU has wasted precious time with a discussion of silly schemes such as soft restructuring, or reprofilings. These would have made no difference to Greek debt sustainability but would carry their own inherent risks. The IMF’s hardline position has at least shown the Europeans that they cannot muddle through this crisis with half-hearted schemes. The policy alternatives are becoming increasingly clear. Either the EU/IMF continues to bankroll Greece for as long as it takes, or Greece will be forced into a hard default. There is no middle way. Some form of private sector involvement is likely, even desirable for political reasons. But it will not be material in terms of a reduction in the net present value of Greek debt.


A default would mean an average haircut of 50 to 70 per cent. I suspect foreign bondholders might face a near-total loss. In that case, the probability of Greece leaving the eurozone must be high. A “within eurozone” default would bring some relief on debt payments but might be more than outweighed by the damage to the financial sector and the decimation of household savings. The best strategy to generate growth under those circumstances would be a large real devaluation. It is hard to imagine how that could happen without an exit from the eurozone. Once your financial system is already down, the relative cost of exiting may be lower than the cost of staying inside.[my emphasis]

diable

It would be interesting to see how the UK would cope. there is the devil side of me saying "bring it on"

Rochdale_Pioneers

It demonstrates the folly of slashing output at a time when output is already falling. The Greeks are making serious and severe cuts to government spending, this is making people lose their jobs and stop spending money, which cuts output still further thus reducing tax revenue and increasing government spending on benefits. It is the death spiral, an economy which windmills downwards as the government speeds up the decline by slashing harder.

Oik kept erroniously comparing us to Greece, yet we see our own economic growth crashed to stagflation, and our own deficit going up not down in a similar manner. Tory posters then shriek "what cuts" looking at the total spend figure, not bothering to look at the massive cuts in every departmental and local government budget.

So when Greece goes pop - and it will - what is the exposure to the UK? And to you and me as individuals? We haven't seen what happens when a nation runs out of foreign currency to pay its debts (not something we need to worry about for our own debt), yet Greece is teetering, Ireland isn't much better, Spain Portugal Italy et al all owe each other countless billions they can't afford, and we haven't mentioned the gazillions of Euros borrowed by Eastern Europeans from western banks which they invested in a speculative (now popped) property bubble. For all the fuss about Northern Rock, its mortgage default levels were low. Once the debt bubbles start popping, there's a huge amount of eastern pain to come.

Generali

Are you seriously trying to suggest that Greece's problems came from cutting spending?

Rochdale_Pioneers

Generali wrote: »

Are you seriously trying to suggest that Greece's problems came from cutting spending?

In getting where they were when they needed a bailout? No. But the death spiral to the bottom shouldn't be that much of a surprise. Slashing spending generally means jacking up unemployment, either from those directly in the public sector or those private sector jobs that service the public sector. People who lose their jobs claim benefits which increases spending on that area, and has the effect of making many others afraid of their own prospects, thus spending less cash thus depressing the economy further.

You can't run away from the facts here - their economy is crashing faster than they can cut spending. Their cuts are increasing their deficit and are clearly counter-productive. Sat here in a country borrowing record amounts despite slashing 20% and more from most government departments, I can't say I am surprised. The time to rebase an economy so that the state is smaller is when business is booming - the private sector can take up the slack. Only in free-market dogma world can the private sector surge ahead when an economy is crashed.