This can happen if or
when Greece falls

Photo: Dimitri Messinis / SCANPIX / AP

Despite the fact that Greece last year was allocated 110 billion Euros in crisis loan from the EU and the IMF, little has gone in the right direction for the embattled country.

More and more people believe that it is no longer question whether, but when Greece falls. Overall, Greece has total loans of 340 billion Euros.

Several experts expect a collapse in the next few days, writes Swedish Affärsvärlden.

Record Interest
Interest rates for the Greek government debt continues to rise this week, despite the fact that the government met to discuss yet another tightening package. The yield on ten-year government bonds rose to 16.8 percent, the highest level in the Euro zone’s history. The yield on two-year government bonds rose to 25.6 percent.

- There is much bad news out there. We have our doubts about the European cut plans, and its weaker economic data all over. The only thing that has pushed up the stock market is that the earnings season is now ending. It means that people will pull their money away from risk, "said Paul Zemsky at ING Investment Management told Bloomberg.

Refusing to accept the Greek government securities?
Several key players have said that banks will soon not accept Greek government securities as collateral. It will mean that the Greek banking system will be left without funding opportunities.

Economist and columnist Andrew Lilico on his blog made ​​a summary of what he thinks happens when Greece, probably in the next few days, will be unable to meet its payment obligations. 

Swedish Affärsvärlden says this is no reading for the timid…

British economist

It is when, not if

Andrew Lilico

Andrew Lilico’s predictions in ‘The Telegraph’:

It is when, not if. Financial markets merely aren’t sure whether it’ll be tomorrow, a month’s time, a year’s time, or two years’ time (it won’t be longer than that). 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 when Greece defaults. Here are a few things:

 - 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 (this is a classic ploy of countries defaulting)
- The New Drachma will devalue by some 30-70 per cent (probably around 50 per cent, though perhaps more), effectively defaulting 0n 50 per cent or more of all Greek euro-denominated debts.
- 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 regulatory capital adequacy requirements.
- 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 recapitalise the ECB, or (b) to allow the ECB to print money to restore its solvency. (Because the ECB has relatively little foreign currency-denominated exposure, it could in principle print its way out, but this is forbidden by its 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.)
- They will recapitalise, and recapitalise their own banks, but declare an end to all bailouts.
- 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.
- Bondholders will take the Spanish Banking Sector to the European Court of Human Rights (and probably other courts, also), claiming violations of property rights. These cases won’t be heard for years. By the time they are finally heard, no-one will care.
- Attention will turn to the British banks. Then we shall see…

Andrew Lilico is an Economist with Europe Economics, and a member of the Shadow Monetary Policy Committee. He was formerly the Chief Economist of Policy Exchange.

Sources: http://www.dn.no/
and: http://blogs.telegraph.co.uk/finance/andrewlilico/100010332/what-happens-when-greece-defaults/