What would happen if Greece defaulted?

With the Greek debt issue all over the media we thought we would share this article from the BBC website which gives a short outline.

Europe’s banks are big holders of Greek debt, with perhaps $50bn-$60bn outstanding. An”orderly” default could mean a substantial part of this debt being rescheduled so that repayments are pushed back decades. A “disorderly” default could mean much of this debt not being repaid – ever.

Either way, it would be extremely painful for banks and bondholders.

What’s more, Greek banks are exposed to the sovereign debts of their country. They would need new capital, and it is likely some would need nationalising. A crisis of confidence could spark a run on the banks as people withdrew their money, making the problem worse.

A Greek exit from the euro is seen by some as inevitable if the country defaulted. The big question would then be, what about other heavily-indebted nations in the eurozone?

It might be a repeat of the collapse of Lehman Brothers, which sparked the credit crunch that pushed Europe and the US into recession.

What does all this mean to the UK?
According to figures from the Bank for International Settlements, UK banks hold a relatively small $3.4bn worth of Greek sovereign debt, compared with banks in Germany, which hold $22.6bn, and France, which hold $15bn.

When you add in other forms of Greek debt, such as lending to private banks, those figures rise to $14.6bn for the UK, $34bn for Germany and $56.7bn for France.
However, any knock-on from Greece’s troubles would exacerbate the UK’s exposure to Irish debt, which is larger.

The UK’s direct contribution to any Greek bailout is limited to its participation as an IMF member. But the indirect effect of a Greek default on the UK would be incalculable.

Source of article: BBC iPad application 04/11/11

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