What Might Happen to Greece Post-Bankruptcy

For months now, experts from the Swiss investment bank UBS have been arguing that bankruptcy is an inevitability for Greece, indicating March of this year as the likely point when the country will be forced to face reality While Geek going bankrupt should not make Portugal, Spain or Italy insolvent any time in the near future, it will have serious implications for Europe's growth and will lead to a renewed reflection on the validity of the euro as an integration economic tool. Recently, criticism of the excessive economic rigidity being placed upon Greece by the European Union, International Monetary Fund and European Central Bank has been mounting. The social situation in Athens is very hot, and the whole country seems like it could be on the verge of a major upheaval. Many are starting to wonder if the harsh austerity measures will save the country or if it will just prolong the agony. If in fact that second argument is true, Greece may be better off defaulting and exiting the eurozone. At that point, the question then becomes: will bankruptcy ruin Greece for the next decade, or could it pave the way for Greece to become the next Argentina? Argentina declared bankruptcy about a decade ago, refusing to honor man of its debts, ending its currency's parity with the US dollar, and breaking with the leadership of the International Monetary Fund to declare its own financial conditions. Since then, the South American country has recovered to become one of the stronger economies in the world. Meanwhile, as Greece attempts to avoid bankruptcy, European banks are proceeding to devalue Greek bonds by up to 60%. At the end of 3Q 2011, for example, the Italian bank Banca Intesa owned $1.31 billion in Greek bonds. Now, the value of those bonds is at $586 million, a correction of about 55%. As the call for Greece to default gets louder in some circles, it is worth taking a look at a study UBS and Citigroup did a few months ago about the possible effects of a Greek default. The study put forth two potential scenarios following an announcement from Athens that Greece will not repay many or all of its debts. The first scenario involves heavy debt restructuring. Greece would remain in the European Union, but would only repay between 15-35% of its public debts. This is essentially already happening with the bonds owned by the banks. The second – and perhaps more worrisome scenario – includes a return the drachma. All deposits and financial instruments would be converted back to the old currency, which would result in a sharp, almost instantaneous devaluation. In this scenario, Greece might refuse to pay backs its debt, with creditors seeing losses of conceivably up to 100%. UBS and Citigroup suggest a major bank run could occur if Greece moves closer to a true default. Actually, depositors have been withdrawing money from Greek banks for a long time now, with Credit Suisse reporting that the top four Greek banks lost about 25% of their deposits during the last quarter of 2009. The rest of the European Union, in reaction to a return to the drachma and the subsequent devaluation, might impose customs duties on Greek goods for an amount equal to the devaluation itself according to the study. That could result in a collapse of trade between the Greece and the rest of the continent, which could be disastrous. It might even lead to a possible domino effect, hitting the most fragile European economies hard and causing serious geopolitical problems. The study concludes that international authorities, in order to avoid the grim possibilities of that second scenario, must save Greece. Is that what is really happening right now? Or is Greece being sacrificed to quiet the consciences of others who do not want to consider that the idea of a lasting pan-European currency and economic union is unrealistic?