Most investors may think that a Greek debt default will not affect them. After all you probably do not have Greek stocks in your portfolio. But you may have invested in European stocks. The question as time runs on a Greek debt deal is what will be the consequences of Greek debt default. When Wall Street crashed in 1929 many businessmen in Main Street America did not think that what happened in New York would affect their lives in the heartland. A couple of years later the Great Depression proved them wrong. The consequences of Greek debt default will first be felt in the European Union but the ripple effect may extend across the globe. Here are a few thought about the consequences of Greek debt default.
Effects on the EU and Its Economy
The immediate consequences of Greek debt default depend on who does not get paid. The Financial Times speculates on the consequences of a Greek default.
The short-term consequences of a default may depend on who exactly the Greek government fails to pay, as well as on the reaction by creditors – in particular depositors and the ECB. A default by Athens on domestic payment obligations, in the form of IOUs to pensioners and civil servants, would probably be the least risky. While such a move would almost certainly be challenged in court – as well as creating substantial political problems for the government – any ruling would be delayed.
A default on IMF loans would look politically ugly, as Greece would indirectly be refusing to repay some of the poorest countries in the world who contribute to the institution’s coffers. However, it is generally seen as less risky than a default to the ECB. The fund’s executive board would only be notified a month after Greece had not met its obligations and it would take several months before any concrete steps, which could go as far as excluding Greece from the IMF, were taken.
A default to the ECB is generally seen as the most treacherous option. The Greek banking system relies on emergency funding from the central bank and any decision to close the liquidity taps would result in lenders being unable to meet their obligations.
In short, if Greece cannot pay its obligations, it may get to choose the least difficult option first. If Greece is simply unable to continue it will need to print its own currency and it alone.
Who Wins and Who Loses
First on the list of consequences of Greek debt default are the creditors. Greece owes roughly €360 billion to various banks, governments, the International Monetary Fund and the European Central Bank. Governments can print money. Banks will be losers. Market Watch agrees regarding the losers if Greece quits the Euro.
Whatever happens, the creditors (led by Germany) will pay.
If you are invested in bank stocks in Europe you may want to think about this.Then the issue is the departure of Greece from the European Union as well as monetary union.
Is Leaving the EU a Bad Thing?
Forbes speculates that the consequences of Greek debt default, leaving the Euro and leaving the Euro Zone would not be all bad in the long run.
[N]ew research shows that there’s not really been any benefits from having the euro in the first place. So, leaving it isn’t like to to produce any ill effects once the transition itself is over with.
[T]here’s a positive effect of a currency union, increased trade, and a negative effect coming from the entire area having to have the same monetary policy.
The negative effects at this time are such that the long term consequences for Greece of debt default may not be as bad as expected.