Don't kid yourself: A Greek exit is a Black Swan
“For me, a Greek exit has long since lost its horrors.”
--German economy minister Philipp Rosler, July 22, 2012
So let me get this straight. Europe has been moving heaven and earth for the past two years to prevent a Greek exit. We were informed in hushed tones that a Greek exit would be a disaster for the eurozone. Trichet said that default by a eurozone government was impossible and “unimaginable”, and that such talk was irresponsible. We were told that anglosaxons didn’t understand “Europe”, that our arithmetic and pencilled debt ratios were irrelevant.
Now, the European wizards are telling us that a Greek exit/default/repudiation is not only thinkable, but not a big deal. “Nothing to see here folks, move along.” As a colleague at Moody’s used to say about managements in general: “No problem, no problem, Oops!, no problem.”
So don’t worry that, after spending billions to prevent an exit, Europe is about to cut Greece loose. There will now be fewer but better eurozone governments; what Radio Tokyo used to call a “strategic consolidation of forces”.
My prediction is that Trichet was right all along: a Greek explosion could be a disaster for the eurozone. First of all, Greece owes a lot of people a lot of money: the ECB, the EFSF, the IMF, the European banking system, and all of the hapless depositors in Greek banks. They will all be defaulted upon, with varying consequences. Just because we have all "known" that this would eventually happen doesn't mean that the world won't be thunderstruck when it does. A Greek exit will be a very big deal with a plethora of known unknowns and unknown unknowns. For example:
Will foreign governments freeze Greek banks’ assets and liabilities?
Who will be the receiver for Greek bank branches in London?
How will UK banks view their continental counterparties in Spain and Italy after a Greek redenomination?
How will Greece treat Greek citizens with euro deposits in foreign banks?
Will Greece close its borders and confiscate all euronotes?
What kind of exchange controls will Greece impose?
What will become of euronotes issued by the Bank of Greece? (Note: The identification code letter is Y.)
What will be the accounting treatment for frozen deposits in Greek banks?
How will Greek bank and government bonds be valued on banks’ books?
When Greek default rips a huge hole in the ECB’s balance sheet, will this require a recapitalization (which will annoy the German public)?
What will the Bundesbank’s balance sheet look like after Greece repudiates its TARGET2 liabilities?
How will the ECB treat the Bank of Greece and the Greek banking system after exit?
How will Greece pay for essential imports on Day Two?
If the Greek government loses control, will the army step in, as it did in 1967?
Will European governments have to intervene and purchase at par all Greek assets held by their banks?
How big a dollar swap line will be required by the ECB?
Can the looney-tunes in Congress prevent the Fed from lending to the ECB?
How soon before foreign creditors try to seize all Greek government assets outside of Greece?
When the Greek government and banks are declared in default under English law, what happens then?
Will European banks do business with Greek banks who are in default on deposits and bonds?
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I’ve gotten tired of listing the known unknowns, but you get the idea. A Greek exit, if it occurs, will be a Black Swan as big as Lehman. It will be “the” event of 2012 (unless Spain goes too).
A Greek exit may have lost its horrors for Herr Rosler, but not for me.