Jim Jubak
The odds of a Greek default and the country's departure from the euro are rising again.
Paddy Power, Ireland's biggest bookmaker, quotes odds of 5-4 that Greece will be using the drachma again by the end of the year. The country also is the betting line's hands-down favorite for the first country to leave the euro at 1-4. Portugal is a distant second place at 8-1.
But what would a Greek default and departure from the euro actually mean?
End of the world, or will we feel fine?
I've seen a description from hedge fund manager John Paulson calling the resulting chaos "a greater shock to the system than Lehman's failure, immediately causing global economies to contract and markets to decline." A Greek default and exit from the euro would likely spell the end of the euro, he has said.
German Finance Minister Wolfgang Schäuble, on the other hand, has gone out of his way recently to suggest that it would be no big deal. Certainly Germany would like to keep Greece in the euro and eurozone, but if attempts fail "we're better prepared than two years ago," Schäuble has said.
The global financial markets seem extraordinarily blasé. When European finance ministers canceled their Feb. 13 meeting, during which they were to approve (or not) the Greek rescue package, stocks didn't plunge and the euro didn't plummet. Same when a conference call on Wednesday passed without discernable progress and with talk of pushing the decision off until March 1 or even later.
So, should you be quaking in your boots or switching from CNBC to watch Linsanity on ESPN?
As with so many investment questions, the answer depends on the time frame.
In the short run, I think a Greek default and possible departure from the euro would be devastating to Greece, but not an especially big deal to European or global financial markets.
In the long run, I think a Greek default would indeed hit the euro hard, sending interest rates skyward in Italy and Spain, and ending the eurozone as it's currently constructed.
Formula for Grecian pain
Let's start with the short term, OK?
A Greek default and/or a departure from the euro would come down really, really hard on the Greeks, very quickly. Judging from the experience of Argentina, which defaulted in 2001, Greeks would see their bank accounts frozen and ATMs closed. Transactions in anything other than cash would dry up. And even companies with cash would have trouble finding suppliers who would accept it.
Barter would become the preferred medium of exchange. Contracts would need to be renegotiated, and, in the meantime they'd be null and void. The country's banks would be closed pending reorganization -- and who knows where the capital for that would come from. (The first to recover the ability to do business would be Greek banks with foreign parents. Other banks would wind up putting themselves on the block to foreign banks with cash.)
The country's ability to import would be close to nil, not exactly a minor issue for a country that imports its oil. In 2011, Greece ran a current account deficit of 4.6% of gross domestic product; creditors willing to fund such a deficit will be few and far between. When the banking system did reopen and the government did issue a new currency, Greeks would find themselves coping with runaway depreciation as a new drachma (or whatever) sank and sank while it tried to find its real rate of exchange.
From the Argentine experience, we know where the Greek government will look for the cash to pay its bills if it's cut off from the financial markets. Argentina raided the retirement accounts -- the country's equivalent of 401k plans -- and central bank reserves. Greek citizens can expect the same, which is why so many are desperate to move their money out of Greece.
Argentina had a relatively easy time pulling itself out of the hole created by the default, thanks to a boom in global commodity prices. But Greece isn't the commodity exporter that Argentina is.
In the short run, the Greeks won't be the only ones taking punishment. Banks and other investors who own Greek bonds will see the value of those bonds drop, temporarily at least, to zero. In the Argentine default, the country and 95% of its bondholders reached a settlement in 2005 that paid bondholders 35 cents on the dollar. About 5% of the holders of the then-$81 billion in Argentine debt have refused to accept the deal and are still trying -- any way they can -- to collect their money. (That's one reason Argentina still can't access global financial markets.)
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