This is What Happens When a Government Defaults…

For many investors in silver and gold, they invest as a hedge against inflation and also against government default. Most investors find it hard to believe that we will actually see a major government default on their debt. Is this outside of the realm of possibility? Unfortunately the answer is no.

The article below by Andrew Lilico of the London Telegraph lays out a very thorough outlook of what might occur when Greece defaults. Notice I did not say if but when. There are multiple leaders within Europe and different respected economists who have shown that Greece simply cannot pay its bills and is left with only one option: default.

As a disclaimer, I do not agree with everything written here, but I think his general points are well developed. Let’s see what a default would look like.

“It is when, not if. Financial markets merely aren’t sure whether it’ll be tomorrow, a month’s time, a year’s time, or two years’ time (it won’t be longer than that). Given that the ECB has played the “final card” it employed to force a bailout upon the Irish – threatening to bankrupt the country’s banking sector – presumably we will now see either another Greek bailout or default within days.

What happens when Greece defaults. Here are a few things:

- Every bank in Greece will instantly go insolvent.

- The Greek government will nationalize every bank in Greece.

- The Greek government will forbid withdrawals from Greek banks.

- To prevent Greek depositors from rioting on the streets, Argentina-2002-style (when the Argentinian president had to flee by helicopter from the roof of the presidential palace to

evade a mob of such depositors), the Greek government will declare a curfew, perhaps even general martial law.

- Greece will redenominate all its debts into “New Drachmas” or whatever it calls the new currency (this is a classic ploy of countries defaulting)

- The New Drachma will devalue by some 30-70 per cent (probably around 50 per cent, though perhaps more), effectively defaulting 0n 50 per cent or more of all Greek euro-denominated debts.

- The Irish will, within a few days, walk away from the debts of its banking system.

- The Portuguese government will wait to see whether there is chaos in Greece before deciding whether to default in turn.

- A number of French and German banks will make sufficient losses that they no longer meet regulatory capital adequacy requirements.

- The European Central Bank will become insolvent, given its very high exposure to Greek government debt, and to Greek banking sector and Irish banking sector debt.

- The French and German governments will meet to decide whether (a) to recapitalise the ECB, or (b) to allow the ECB to print money to restore its solvency. (Because the ECB has relatively little foreign currency-denominated exposure, it could in principle print its way out, but this is forbidden by its founding charter. On the other hand, the EU Treaty explicitly, and in terms, forbids the form of bailouts used for Greece, Portugal and Ireland, but a little thing like their being blatantly illegal hasn’t prevented that from happening, so it’s not intrinsically obvious that its being illegal for the ECB to print its way out will prove much of a hurdle.)

- They will recapitalise, and recapitalise their own banks, but declare an end to all bailouts.

- There will be carnage in the market for Spanish banking sector bonds, as bondholders anticipate imposed debt-equity swaps.

- This assumption will prove justified, as the Spaniards choose to over-ride the structure of current bond contracts in the Spanish banking sector, recapitalising a number of banks via

debt-equity swaps.

- Bondholders will take the Spanish Banking Sector to the European Court of Human Rights (and probably other courts, also), claiming violations of property rights. These cases won’t

be heard for years. By the time they are finally heard, no one will care.

Attention will turn to the British banks. Then we shall see…”

The one option that is not laid out is European governments continuing to extend bailouts to Greece and the economic time bomb is kicked further down the road. So how would silver and gold be impacted? As I have mentioned before, I think there are two options. First, we could see the historic result.

Mainly, investors could flood into the dollar causing appreciation of the dollar and a fall in commodity prices. On the other hand, investors could see precious metals as a safe haven, which would cause the price on both silver and gold to go up.

Quite frankly, when we see Europe dive into this economic crisis, we will see a global economic crisis, which could make 2008 look like a piece of cake. This means that there will be very few places investors can safely put their money. All the equity markets will be hit severely and there will be such a fear of government debt after the situation in Europe that leaves very few options for investors.

The question is will investors challenge the normal course of action or set a new course during these hard economic times?

http://livesilverprices.net/debt-default/

Related articles

• Finding a Sustainable Solution for Greece’s Debt (online.wsj.com)
• Fitch downgrades Greece to one step above default (seattletimes.nwsource.com)
• Italian borrowing costs jump; Greece downplays debt crisis (usatoday.com)
• What happens if Greece defaults? (aleksandreia.wordpress.com)