How A Greek Default Could Trigger Another World Banking Crisis

It’s no longer a question of “if” but “when.”

Europe’s central political and economic players are, once again, openly and loudly signaling to the markets (and the world) that Greece is essentially economically sunk.   

Perhaps most relevantly, Germany, and by extension the European Union (which, at this point, is essentially Germany (with a dash of France)), is gearing up for a Greek default.  

As Bloomberg outlines in Germany May be Ready to Surrender in Fight to Save Greece, “After almost two years of fighting to contain the region’s debt crisis and providing the biggest share of three European bailouts, Chancellor Angela Merkel is laying the ground for what markets say is almost a sure thing: a Greek default.”  

Most tellingly, “The Greek government’s top priority is ‘to save the country from bankruptcy,’ Prime Minister George Papandreou said in a Sept. 10 speech in the northern Greek city of Thessaloniki.”  Optimistically, he continued, “‘We will remain in the euro’ and this ‘means difficult decisions.'”  That’s right.  While Greece clings to the economic safety that is the Eurozone, the EU’s hurriedly-and-not-so-subtly prepping for a Greek default.

So there we have it – what once seemed unthinkable (though some of us have been writing  – nay, ranting – on the topic for a while now) – is in the works.  Germany’s pulling back, the European Union is stiffening in its resolve, and Greece now finds itself, alone, teetering on the brink of the economic abyss.   

Interestingly, as Germany steps away from rescuing the dead-beat Greek economy, a Greek default will most likely prove an extremely expensive economic exercise for Germany, the one country in the position to “save” Greece from itself.  In fact, “German banks were the biggest holders of Greek government bonds at the end of 2010 with $22.7 billion, according to data from the Bank for International Settlements.”  What Germany’s doing, then, is shifting funds from supporting the European Union to back home, to domestically buttress against what’s increasingly becoming the inevitable.

What’s next?  Well, obviously, politically and economically, the European Union, as it stands now, will significantly change both shape and face, as Ireland attempts to cut a new deal with the EU (at the absolutely worst time, of course) and Italy and Spain rush ever more steadily toward the brink of their own defaults.

Financially, look for this to potentially trip a world banking (or some variation thereof) crisis (again).   For while we all know Germany’s concerned about the amount of Greek debt German banks are holding, it’s possible, and most likely, that several bulge-brackets have underwritten these holdings.  The traditional “There’s no risk, this is easy money!” thinking that drove AIG’s CDS-driven downfall permeates the banking industry, and one assumes more than one major financial institution thought to itself, “The European Union will never let Greece default – this is a great revenue play.”  Consequently, post-default, it’s more than a little possible that we’ll see some replay or variation thereof of 2008’s banking tumult.

Don’t believe me?  While I know I’m not alone, I’ve been calling Greece’s default (and the political underpinnings driving it) for a while now.  The markets may trade on optimism (and policy ignorance), but the writing’s on the economic wall: Greece’s default will soon be hitting a country – or bank – near you.

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