Dumb question

mwpt

Generali wrote: »

There are plenty of ways to skin the default cat.

Despite the twaddle being peddled by the Leave campaign, individual EU states remain sovereign. There would be nothing to prevent Greece passing a law in their national Parliament to leave the Euro and put in its place a new currency: the New Drachma. The Euro and Drachma could then be swapped on a 1:1 basis on adoption and then the Drachma could be allowed to float freely against the Euro. The Greek Government could allow for all debts owed by Greek people (corporations are people in law don't forget) to be redenominated into New Drachma.

As long as pari passu is respected (all debtors are treated on an equal footing) then it should wash out okay.

Yes and no. I don't know what you mean exactly by wash out ok, and as I mentioned, their sovereign debt is still denominated in Euros. They can't just pay it back in whatever currency they choose, they'd have to purchase Euros to do so and that would probably involve a default since trying to buy out Euros by printing their new currency isn't going to end well.

Masomnia

It seems to me that the main down side to defaulting would be that they could not access bond markets, but as Greece before the interest bill is added is running a surplus it can't be too bad an option for them.

Would it really be so much worse than the austerity that is now being forced?

Generali

mwpt wrote: »

Yes and no. I don't know what you mean exactly by wash out ok, and as I mentioned, their sovereign debt is still denominated in Euros. They can't just pay it back in whatever currency they choose, they'd have to purchase Euros to do so and that would probably involve a default since trying to buy out Euros by printing their new currency isn't going to end well.

Yes they can. They are sovereign. If they pass a law to switch Euro denominated debts to New Drachma, what can anyone do about it? Really, all you can do to force a sovereign to do something is invade and put in your own sovereign. Is Germany about to invade Greece in order to make it use the Euro? I have my doubts.

It would be a default of sorts but there have been plenty of those over time, even by the UK (despite all the people that will tell you that the UK has never defaulted).

mwpt

Generali wrote: »

Yes they can. They are sovereign. If they pass a law to switch Euro denominated debts to New Drachma, what can anyone do about it? Really, all you can do to force a sovereign to do something is invade and put in your own sovereign. Is Germany about to invade Greece in order to make it use the Euro? I have my doubts.

It would be a default of sorts but there have been plenty of those over time, even by the UK (despite all the people that will tell you that the UK has never defaulted).

Well, I think we agree, it would constitute a default because the debtor won't be paying the creditor in the currency the debt is denominated in. In your own words, Greece won't be invading Germany to force it to accept New Drachma payments and Germany will most likely want the matter settled in international courts.

I'm fairly sure international courts would agree that it constituted a default, but welcome more info.

orcocan

Generali wrote: »

Yes they can. They are sovereign. If they pass a law to switch Euro denominated debts to New Drachma, what can anyone do about it? Really, all you can do to force a sovereign to do something is invade and put in your own sovereign. Is Germany about to invade Greece in order to make it use the Euro? I have my doubts.

It would be a default of sorts but there have been plenty of those over time, even by the UK (despite all the people that will tell you that the UK has never defaulted).

of course they can, but it's not a default "of sorts", it's a default full stop

Generali

orcocan wrote: »

of course they can, but it's not a default "of sorts", it's a default full stop

So all the Eurozone countries defaulted when they entered the Euro.

mwpt

Generali wrote: »

So all the Eurozone countries defaulted when they entered the Euro.

Good point. What actually happened?

Generali

mwpt wrote: »

Good point. What actually happened?

The bonds were redenominated (changed from FRF, DEM etc into EUR) and then renominalised so that the bonds all had face value of EUR1,000. The latter allows bonds to be traded.

How easy it is to do this depends on the contract and which country's law the bonds are issued under. Much Government debt is issued under English Law (not UK) requires that a majority of bondholders agree to redenomination but that should be forthcoming if it is clear that a refusal to agree to redenomination will simply be met by an inability to pay and default.

As long as all bondholders are treated in the same way then there isn't a problem there. The term used in bond markets is 'pari passu' which means something like 'on an equal footing'. Greece couldn't redenominate bonds held by foreigners and not those held by locals for example. Each individual bond issue has to have pari passu principles applied but doesn't have to apply across bond issues so you can treat holders of 2026 maturing 3% bonds differently to 2018 maturing 6% bonds but all holders of 2026 maturing 3%s must be treated in the same way (does that make sense?).

buglawton

Generali wrote: »

There are plenty of ways to skin the default cat.

Despite the twaddle being peddled by the Leave campaign, individual EU states remain sovereign. There would be nothing to prevent Greece passing a law in their national Parliament to leave the Euro and put in its place a new currency: the New Drachma. The Euro and Drachma could then be swapped on a 1:1 basis on adoption and then the Drachma could be allowed to float freely against the Euro. The Greek Government could allow for all debts owed by Greek people (corporations are people in law don't forget) to be redenominated into New Drachma.

As long as pari passu is respected (all debtors are treated on an equal footing) then it should wash out okay.

I am not convinced that international bankruptcy courts would uphold as legal the conversion of the debt to New Drachma. In the case of Argentina when it went bankrupt, the disputed debts remain denominated in USD.

Greece may in fact still try a new currency to worm it's way out but would be restricted for a long time to come in what kind of banking it could do outside of it's own borders. Would be very hard to sell any govt bonds in the new currency too.

It's also an interesting question whether Greece unilaterally leaving the Euro would not be breaking some rule of EU membership or another.