Today, a lawmaker from Greece announced what all of us have seen coming for months: On June 5, Greece will DEFAULT on its sovereign national debt.
UPDATE 1:20 PM — Moody’s Investor Service PUBLICLY WARNS of Bank Deposit SEIZURES for Greek Bank Depositors! ! ! (This will likely cause an IMMEDIATE “run” on all Greek Banks)
We’ve all been following the Greece problem for quite some time, and I think a recap might be a worthwhile endeavor to measure the impact of a potential Greek Default .
1) June 5 is the date on which the next payment from Greece is due to the IMF.
2) If Greece misses that payment – which seems likely – they will be in TECHNICAL default, but not (yet) ACTUAL default. According to IMF rules, it won’t actually BE a “default” for another 30 days.
3) Technicalities aside, if Greece defaults on June 5, then the European Central Bank (ECB) and any other entity holding Greek Bonds will realize those Bonds are not worth the paper they’re written on. WHAT HAPPENS NOW?
4) If the ECB has to write-off the Greek Bonds, will they then halt all other sovereign debt financing? That would make no sense since other countries are solvent. So what will the impact actually be to the ECB and other nations? I think: No impact at all.
5) What about individual EUROPEAN AND AMERICAN banks that are holding Greek Bonds? This seems to be where the trouble comes. Those banks will have to write-off those bonds, which will instantly put the bank books out-of-kilter. The bank balance sheets will show the bank to be over-extended on assets-to-liabilities. That will cause an instant HALT to those banks being able to lend money.
6) Within hours or perhaps a day or two, the NAMES OF EUROPEAN and AMERICAN BANKS with the most losses on Greek Bonds will become public (if it is not already public). It will also become common knowledge that those banks books are not stable. Will depositors then demand their money out of those banks? This is the NEXT TROUBLE SPOT.
If Depositors start demanding their money out of those banks, those banks will go bust. Maybe the ECB and the Federal Reserve (for U.S. banks) can provide emergency liquidity to those banks, but maybe they won’t.
Let’s presume the ECB and the Fed say “no” to emergency liquidity. They may be FORCED to say “no” due to statute law regarding them lending to now-insolvent banks! Several LARGE European and American Banks go bust. This sets-off more runs against more banks. The European banking system collapses as does the European stock market.
7) With European banks and stocks in collapse, will the financial fears spread to the United States? I think the fear WILL spread.
8) Who hold Credit Default Swaps (CDS) on Greece’s Debt? Banks! When Greece defaults, creditors will seek to exercise those CDS, which might — just might — take out a few big banks around the world; probably primarily here in the U.S.
If so, I believe we will see a similar “run” against US banks and similar crash of US Stocks. Once the U.S. goes, the rest of the world follows.
9) Result: Worldwide economic depression and financial ruin.
Did I guess wrong? Did I forget something?
— Prof. Steve Hanke (@steve_hanke) May 20, 2015
HFE: A default event by #Greece is inevitable. It owes to Eurozone €300bn, or 3% of EZ GDP. Greek banks are in hole to ECB by another €150bn
— Holger Zschaepitz (@Schuldensuehner) May 18, 2015
Greek Default Announcement: http://www.ekathimerini.com/4dcgi/_w_articles_wsite1_1_20/05/2015_550206
Moody’s Deposit SEIZURE Notice: http://www.zerohedge.com/news/2015-05-20/gloves-come-moodys-warns-greek-deposit-freeze-schabule-wont-rule-out-default
Lehman went totally under and AIG had to be bailed out with $700 Billion in taxpayer money. That cannot happen with Greece. There is no one to bail them out; no one to come riding to the rescue. The default will be REAL and cannot simply be a “non-event.”