INSTANT CLASSIC: David Zervos Imagines If California Went The Way Of Greece

David Zervos

Photo: Bloomberg TV

Comparing California to Greece is not a totally new thing. We’ve done it ourselves in the past.But Jefferies’ David Zervos has taken it to a new level in his latest epic note, which tries to explain what would happen to California if the U.S. had the same fiscal/monetary structure as Europe, meaning that there was no federalization of spending at all.

Anyway, we’re going to summarize this in bullet points.

  • First, California promises its citizens way too much (early retirement, generous pensions, all you can drink ouzo, etc.) and it runs out of money.
  • “Suckers” who bought California debt rush to the exits and California can no longer borrow.
  • California goes to Congress begging for a bailout, which it gets (because it’s systemically important), but with major strings attached.
  • The collapse in spending in California will cause riots.
  • California takes a hard turn to the left.
  • California elects a new governor called Alexis Baldwin (geddit?).
  • Officials in DC cut California off from Fed lending.
  • The ‘Central Bank of California’ however, starts funding the state via its own Emergency Liquidity Assistance (ELA) scheme.
  • However the Central Bank of California runs big deficits with other state central banks via the Target2 scheme.
  • Californians stage a run on California banks.
  • They move their deposits to safe banks in “shale” states like North Dakota.
  • California tries a deposit guarantee scheme.
  • But with no trust in California’s credit rating, this deposit does nothing.
  • Finally, after a massive run, Alexis Baldwin starts printing his own currency.
  • A massive hole is blown in the Fed’s balance sheet.


Read more of Zervos and Jefferies research at Markit Hub >

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