What if Greece defaults?

Would the effects of an expected failure of a nation be largely symbolic?

Given that the entire Greece saga has been playing out for a number of years - and most speculation is that Greece will eventually default - when they finally default, will it be largely symbolic?

That said, buying Greek bonds would be an extremely high risk even now. (Isn't it 28% or so?) Banks that have lent Greece in the past are already having to prepare privately to add the hit for these bad debts to their books. Their investors must also take this into account in the share price.

Would it then make sense for Greece, even though it is not yet in default, to have an opinion with regard to Greece that there will be a default in the future? So it won't be a shock to anyone if it happens, and it won't hit the world economy badly because, for the most part, it will confirm something that was recognized years ago.

littleadv

It will affect the Greeks as every bankruptcy affects the bankruptcy. They have already started to reduce their welfare policies and government handouts. Failure to do so would mean that the government cannot meet its obligations. It's not just external commitments, but internal commitments as well - pensions, social security benefits, healthcare, public services, military (and the Greeks have been in constant confrontation with neighboring Turkey over the years with multiple armed conflicts) to be struck.

Yes, they will definitely be affected a lot more.

Joe.E

+1 good point in terms of internal commitments. How do you rate the impact on the rest of the world?

littleadv

@ Joe It's bad for the rest of the world because it affects the Eurozone a lot. Basically, this proves the point the British tried when they refused to go along: France and Germany bear the weight of the PIGS social policy (Portugal / Italy / Greece / Spain). This could weaken the European economy and discredit the euro currency, which in turn will lead to its devaluation. Not pretty.

Joe.E

pretty true. Although I would argue that since everyone is already anticipating a Greek default, much of the euro’s depreciation has already taken place to reflect that. An open market is a forward pricing mechanism.

littleadv

@ Joe - that's an opinion. I don't really think that everyone expects Greece to fall behind, especially not the Europeans. Otherwise they wouldn't be streaming that much money to Greece. If you think it will default - why give more money? Like any other bankruptcy, let them default and restructure. The mere notice of default, however, leads to devaluation, falling credit ratings for the entire euro area and, of course, instability as no one knows what is being paid out and what is being written off. This will also trigger defaults and bankruptcies for the various lenders. Not pretty at all.

Marco Demaio

@littleadv: Portugal are Ireland (not Italy) Greece and Spain. :) But now it's PIIGS that comes with Italy too. Italy cannot be saved, there is too much money for the other countries. If Italy defaults, the euro will collapse. In addition, dozens of banks (including German ones) could also collapse because they are full of Italian bonds.

mbhunter

It's only symbolic when things go on like nothing happened. As soon as large sections of people become poor, it ceases to be symbolic and becomes real.

Will there be a Greek default in the US? Hard to say, but probably not. Will it be felt in Greece? Bet it will be like that?

Joe.E

I think the question I am trying to ask is more: how would that affect Greeks more than it does now? Few foreign companies are willing to invest in them now ... they are being subjected to severe austerity measures. Anyone who thinks Greek banks will go bankrupt can now withdraw their money. So if what is already predicted happens, what will change?

Chuck van der Linden

I think the problem is that the proposed austerity measures are not being well received by the population, who sometimes seem to be at the level of rebellion over cuts in their entitlements. If not, I think it would be almost as bad for the population as a whole to wake up and smell the coffee, but so far that doesn't seem to be happening, and it just prolongs the agony and deepens the hole they're in.