Obviously, a Greek default could have major consequences on financial markets but allow me to ask whether this should be primarily Greece’s concern or someone else’s?
The table below shows that Greece has been in default about half the time since her independence. Somewhere else I had once seen a statistic putting that figure at two-thirds. Either way, a default now would not be a radical precedent in the history of modern Greece.
It all depends how a default is handled. The first question is: was default provoked by the borrower or did it come about after all attempts to avoid it had failed? Greece would be foolish to provoke a default but she could consider letting it happen.
Once default happens, all hell can break loose — outside the country! In the country, it all depends on whether the government has “put aside” enough liquidity to allow normal operations for a reasonable period of time. Here I would have confidence in “Greek creativity” on the part of the government that such liquidity has been put aside.
A liquidity run on Greek banks? Could very well happen which is why a temporary freeze on deposits (with only minimal withdrawal possibilities for personal use) must be imposed.
Bankruptcies of Greek banks? Would be a real threat considering that banks would have to write-down the value of their Greek bonds. The government would have to be prepared to put in place a bail-out package.
The most important thing is that Greece can reach as soon as possible a situation where she is deemed by the EU to be acting in good faith to reschedule her debt with existing creditors. If that can be accomplished, Greece should expect the EU to provide bridge-financing for the budget and current account deficits. Based on numbers of the last few months, this should come to about 3-4 BN EUR per month in Fresh Money requirements when including full interest expenses. Since significant reductions of interest would be part of the rescheduling negotiations (and perhaps even capitalization of some interest), the monthy cash requirement could be reduced quite a bit.
Could creditors boycot the above action plan? Yes, they could but it wouldn’t make sense for them because they have much more to lose from a boycot than from an orderly and fair debt rescheduling. And for those who predict the end of the world should governments not pay out private sector creditors, the EU should have lists prepared of all the sovereign debt reschedulings which have been made since WWII so that private sector creditors (and the public!) understand that a debt rescheduling is quite a normal thing to do.
Tax payers of surplus countries who have become accustomed to hearing amounts of first 110 BN EUR and then another 130 BN EUR should be quite relieved when they now hear that “only” about 3 BN EUR per month are required.
And parallel to the debt rescheduling negotiations, a giant private sector investment stimulus would have to be arranged for Greece (private foreign investors, EIB, Structural Funds, etc.).
If this process is managed swiftly and successfully, a very surprising thing could happen in financial markets: within only one year, and even if the debt rescheduling has not been completed yet, one might see the prices for Greek bonds increasing in value again. Why? Because once there is good news for a positive future perspective for Greece, investors will start speculating that this positive perspective might indeed come true.