Arnold Kling  

How a Sovereign Default Plays Out

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Andrew Lilico writes,


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

- Every bank in Greece will instantly go insolvent.

- The Greek government will nationalise 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.


Have a nice day. Pointer from Tyler Cowen.

I am reminded that Carmen Reinhart uses the term "financial repression" to describe what countries have to do when hit by banking crises and capital flight. I am also reminded that I am supposed to be writing an article for symposium on how a U.S. sovereign debt crisis might play out. These are the sorts of scenarios that one has to consider.


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COMMENTS (2 to date)
TDL writes:

"- 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."

It is highly unlikely that the Greek state has the ability to maintain martial law. The police force is weak. The military is mostly made up of conscripts who will probably be opposed to martial law.

Regards,
TDL

Arnie writes:

I watch the news because it is way more intriguing than fictional TV. Case in point, Greece. Why Greek debt isn't costing the Greek government 20+% is unexplainable. I assume Greek default and resultant bank restrictions and then riots and further whatnot.

What is crazy is that their German lenders won't riot themselves or go down and stake a claim to some Greek isle as payment. The lenders just don't seem that bothered. THAT is what amazes me.

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