It's The Economy Stupid: So what does a greek default look like? One roadmap....

He's just a little ray of sunshine...

-----Original Message-----
From: DAVE LUTZ, STIFEL NICOLAUS
Sent: Monday, May 23, 2011 10:28 AM
Subject: So what does a greek default look like? One roadmap....


From this week's "That Make You Go Hmmm"

Last week, ECB threatened to refuse Greek sovereign debt as collateral – RBS says If the ECB did follow through with its threat, Greece's banking system would fail - "This is the last card in the hands of the ECB in warning about the implications of a restructuring"

Given that the ECB has played the "final card" it employed to force a bailout upon the Irish – threatening to bankrupt the country's banking sector – presumably we will now see either another Greek bailout or default within days.

What happens if Greece defaults:

• Every bank in Greece will instantly go insolvent.

• The Greek government will nationalise every bank in Greece.

• The Greek government will forbid withdrawals from Greek banks.

• To prevent Greek depositors from rioting on the streets, Argentina-2002-style (when the Argentinian president had to flee by helicopter from the roof of the presidential palace to evade a mob of such depositors), the Greek government will declare a curfew, perhaps even general martial law.

• Greece will redenominate all its debts into "New Drachmas" or whatever it calls the new currency - The New Drachma will devalue by roughly 50%, effectively defaulting on 50 per cent or more of all Greek euro-denominated debts.

The "Contagion"

• The Irish will, within a few days, walk away from the debts of its banking system.

• The Portuguese government will wait to see whether there is chaos in Greece before deciding whether to default in turn.

• A number of French and German banks will make sufficient losses that they no longer meet regula¬tory capital adequacy requirements.

• Given Paid in capital to the ECB is only €10 billion, the European Central Bank will become insolvent, given its very high exposure to Greek government debt, and to Greek banking sector and Irish banking sector debt.

• The French and German governments will meet to decide whether (a) to recapitalize the ECB, or (b) to allow the ECB to print money to restore its solvency (Forbidden by founding charter - On the other hand, the EU Treaty explicitly, and in terms, forbids the form of bailouts used for Greece, Portugal and Ireland, but a little thing like their being blatantly illegal hasn't prevented that from happening, so it's not intrinsically obvious that its being illegal for the ECB to print its way out will prove much of a hurdle.)

• There will be carnage in the market for Spanish banking sector bonds, as bondholders anticipate imposed debt-equity swaps - This assumption will prove justified, as the Spaniards choose to over-ride the structure of current bond contracts in the Spanish banking sector, recapitalising a number of banks via debt-equity swaps.

• Attention will turn to the British banks. Then we shall see…