i on europe


Brussels blog by some wire service journalists

Analysis: Leaving the euro carries massive costs


BRUSSELS — European leaders have struggled mightily to keep Greece in the eurozone, despite the drag that its economic weakness places on their growth. The reason is this: If Greece abandons the euro, the chaos it would wreak on the global economy can hardly be overstated.

A Greek exit from the euro would almost certainly cause the country to default completely on its debts. A bankrupt Greece would be unable to pay pensions and salaries, and there would be a run on banks, causing them to collapse as people lined up to withdraw euros before the currency changed to drachmas.

Greeks owing money in euros but being paid in drachmas — essentially, a huge currency devaluation — would find their debts suddenly too large to pay, and would go bankrupt themselves. In a country where street violence accompanies even minor civil servant demonstrations, that’s a volatile mix.



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One Response

  1. zencushion says:

    Mr. Melvin, as undesirable as the prospect is, your recent AP article is sensationalizing the potential impact of Greek default. A formal Greek default would of course cause several downstream issues, but you are making it sound like the end of the world.

    You wrote: “Above all, a messy default would trigger massive insurance payouts on those bonds. Because financial groups do not usually disclose how much they hold in sovereign debt, such as Greek bonds, global markets would be seized by a panic over who would collapse.”

    On the contrary, the size of the CDS (default insurance) market in Greek sovereign debt, according to the Depository Trust Corporation, which has recorded 98% of the CDS market positions, is on the order of $3 Billion. $3 Billion is not a small number, but hardly one that would bring the world economy to its knees in a domino-style financial collapse.

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Don Melvin

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