Hypothetically speaking.
Let’s say that this happens and Greece & Spain defaulted. What do you think would happen?
My take,
All major European banks would go bust and would be nationalized. In order to avoid cutting ‘social services’ (and end up like Greece will, with riots, chaos and ultimately a military junta ruling a destroyed country), the major European countries will push the ECB to print loads and loads of money. and the will go into the red zone of debt by the intervention in the bank market too.
Finally, when inflation can no longer be tolerated and productive assets flee form Europe, the end will come, and major riots and a breakdown of social peace will occur in . After all is said and done, and after massive emigration for the continent, the economy will be reset (and perhaps even borders too!) and the old continent will have to start from zero.
The most plausible scenario right now is a limited default by Greece. This option is currently being investigated by a EU group, apparently following a request by the Dutch, meaning it’s being seriously considered.
One possible option is the so called “tango bond” scenario, which would mimic closely what happened when Argentina defaulted its debt in the '90s. Banks simply unloaded as much debt as possible on private investors using very aggressive tactics to say the least. Right now it would be unlikely: in the age of the Internet it literally takes minutes to find out the composition of a financial product your bank is trying to sell you. Of course, most people just don’t really care what they are being sold as long as it carries a good rating (Fannie May and Freddie Mac anyone?) and gives good yield.
A second option, which would be an extension of what was done last year, is the ECB would simply swap Greek bonds at default risk with freshly minted eurobonds. As I’ve already said the ECB has no money of its own and no power to tax except through inflation. Eurobonds need to be bankrolled by governments with a solid financial background, meaning Germany, The Netherlands etc. In short the ECB would act as a middleman, buying Greek bonds and giving thinly disguised high quality German and Dutch bonds in return. On the paper this is a win-win scenario since the junk bonds would simply disappear and both Germany and The Netherlands would not appear as to have increased their own debt. Problem is the money to service the new eurobonds still needs to come from somewhere, in this case the German and Dutch government budget. As much as accounting wizardry is all the rage these days, it’s an inescapable fact: Germans and Dutchmen will somehow have to pay for this, be it through having less “services” (worse roads and hospitals, lower pensions etc) or through increased taxation, be it direct or indirect. How long the common German or Dutchman will tighten his belt for the sake of Greece, nobody can tell.
I would also like to add one thing. I personally believe the problems of Spain do not stem from her debt. Problems are of a social nature: high unemployment (over 25% among young men and women under 30) exacerbated by high immigration and the fact they just put too many eggs in one basket by relying too much on the housing boom, now gone and buried. As far as debt is concerned Italy is in a much more awkward position, being saddled with both an enormous (and fast growing) debt and a shrinking real economy, meaning the capability to service this debt is slowly eroding. Italian bonds still have relatively low yields but these will have to increase fast in light of the recent downgrading of her debt by major rating agencies. The debt will probably increase at a faster pace from here to 2013 as Premier Berlusconi is embarking on yet another of his “consensus buying” campaigns. Compared to Italy bailing out Greece will be a cakewalk.
Kakugo, you know too much!!! What do you read to keep up? Share your sources!! : P