06-29-2011, 03:00 PM
If Greece defaults then ALL the money that they owe becomes marked "never gonna happen". The banks that have lent that money have borrowed more money from the central banks using the money owed by Greece, and the interest on it, as collateral. If the collateral goes up in smoke then those banks will be judged to be incapable of paying back the money they owe. Which will have the same effect on the central banks.
Additionally, if Greece defaults then Ireland and Portugal might follow suit, partly because of the direct effect but also on the basis that they may feel that the game's up and therefore might as well. The same things that apply to Greece apply to Ireland and Portugal. In particular, British banks are massively exposed to an Irish default and it would basically wipe out the UK banking system which in turn, combined with the Eurozone trouble caused by a Greek default would seriously threaten the US financial system which - whisper it - is actually in quite a bad state and being constantly bailed out by the Chinese. This is the Armageddon scenario that the financial world is crapping itself over.
Putting aside a default, exit, and re-issue of the drachma scenario, the other nightmare scenario that simply won't be allowed is that Greek could default and stay in the Euro. That would kill the currency stone dead as it would mean that the EU was saying that the central banks of Europe would allow a member state to borrow on the markets and have the other countries pick up the tab (or try to). At the very least, a defaulting country HAS to be kicked out of the Euro to show that the central banks are serious about not letting this happen again. Of course, it never should have happened in the first place and the fact that it has has brought the EU to the brink of collapse as a unit and even a default and exit for Greece could tip it over the edge; there's no way the Euro could survive a default and stay-in.
The long term is very shaky, even with today's vote by the Greek government as there is every chance that the next election in Greece will see a "stick it up your arse, we're leaving" party win and reverse anything the current turkeys have done to stave off Christmas. That's going to cast a long shadow over the Euro for probably years.
You might have noticed that the Euro isn't apparently very weak despite all this. This reflects the fact that the world's economy is reckoned to be fragile. Basically, all currencies are weak together. Gold is currently at about $1500/oz. People are selling dollars, pounds, euros, yen, and whatever else they have and are buying gold with it. Money as a whole is weak, in other words, while solid objects like oil, gold, even coffee and foods are going up in cost.
Greece may just look like a minor iceberg at first glance, but it's worth remembering that we're all on the Titanic together.
Additionally, if Greece defaults then Ireland and Portugal might follow suit, partly because of the direct effect but also on the basis that they may feel that the game's up and therefore might as well. The same things that apply to Greece apply to Ireland and Portugal. In particular, British banks are massively exposed to an Irish default and it would basically wipe out the UK banking system which in turn, combined with the Eurozone trouble caused by a Greek default would seriously threaten the US financial system which - whisper it - is actually in quite a bad state and being constantly bailed out by the Chinese. This is the Armageddon scenario that the financial world is crapping itself over.
Putting aside a default, exit, and re-issue of the drachma scenario, the other nightmare scenario that simply won't be allowed is that Greek could default and stay in the Euro. That would kill the currency stone dead as it would mean that the EU was saying that the central banks of Europe would allow a member state to borrow on the markets and have the other countries pick up the tab (or try to). At the very least, a defaulting country HAS to be kicked out of the Euro to show that the central banks are serious about not letting this happen again. Of course, it never should have happened in the first place and the fact that it has has brought the EU to the brink of collapse as a unit and even a default and exit for Greece could tip it over the edge; there's no way the Euro could survive a default and stay-in.
The long term is very shaky, even with today's vote by the Greek government as there is every chance that the next election in Greece will see a "stick it up your arse, we're leaving" party win and reverse anything the current turkeys have done to stave off Christmas. That's going to cast a long shadow over the Euro for probably years.
You might have noticed that the Euro isn't apparently very weak despite all this. This reflects the fact that the world's economy is reckoned to be fragile. Basically, all currencies are weak together. Gold is currently at about $1500/oz. People are selling dollars, pounds, euros, yen, and whatever else they have and are buying gold with it. Money as a whole is weak, in other words, while solid objects like oil, gold, even coffee and foods are going up in cost.
Greece may just look like a minor iceberg at first glance, but it's worth remembering that we're all on the Titanic together.