In the interview on Yahoo Daily Ticker on the 24th of May, John Maldin goes into the details of what would happen if a sovereign country of the Eurozone would default. Taking the example of Greece, which is very likely to default in the next few months, he builds quite a catastrophic yet so realistic vision of such a disaster.
If Greece decides to not fulfill its obligations — not even talking about default, because the simple term default would trigger hundred of billions of dollars worth of credit default swaps and other exotic derivatives — the following points are from the interview, but I have augmented them with my own details:
- All Greek dept held by Greek banks is automatically zero — since nobody is going to lend any money to Greece anymore, they would better default on the whole of the debt, and not just take a hair cut.
- German and French banks would then automatically default, because all the billions of Greek debt they hold would be wiped out. And banks all over the world have to write their debt down — particularly the European banks.
- The ECB has to write their debt down, and the debt of all the banks it holds. The ECB will then be facing a conundrum: print money — illegal in this case — or force all the countries of the Eurozone, to contribute to recapitalize the ECB which barely holds 10 billion euros of capital — forcing the credit quality of the Eurozone countries to deteriorate even more.
- The contagion will be worldwide, of course.
John Maldin just published a book titled Endgame: The End of the Debt SuperCycle and How It Changes Everything which I haven't read yet. You might want to check it (sponsored link).