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What Next If Greece Defaults?

The first casualty will be currencies as a stable measure of value...

EU MINISTERS promised the next tranche of money to Greece at the weekend. They also promised a second bailout package if Greece enforces another bout of austerity on itself. Does this clear the EU of its obligations? asks Julian Phillips at

The ministers have not yet finalized these terms and await the next episode in Greece of its acceptance of this principle. 

A default by Greece will set off a chain of events that would bring down important banks as well as Portugal, Ireland and Spain, with Italy stepping onto the same stage. Furthermore, a default shows that even governments have to pay their bills, if they want the financial system to work. 

The issues involved are significant; the consequences even more far-reaching. The whole thing throws up a lot of questions.

Are politics more important than finance? If an electorate or a body of elected officials decides that they are not able to repay excessive debt, are they entitled to refuse to do so? Or are they entitled to dictate at what pace and volume they repay debt?

It appears to be accepted that shareholders and owners carry the risks of their investments and suffer losses if their investment fail, but should bankers have to suffer losses if they lent recklessly? If they over-lent, should they suffer losses too? They should and it is the law worldwide. 

If a nation defaults, should creditors be able to seize assets inside a country? International law brings Jurisdiction onto the table and the law of Jurisdiction in this case deems the debtor controls the decisions on how the law is applied. If the Greek Parliament says it won't be paid, but will, in their way and time, then that is law.

These are the issues under discussion in Europe and these are the issues to be tested in the days to come. We live in a global world now where banking and their loans assets bases stretch across the world. Government business has always been so certain and profitable; however, now that governments have become dubious debtors, the applecart is overturned. 

There is no clear international procedure that governments will follow in the event they stop following the 'rules'. There are a firm set of rules for the system to work. This is not just about Greece. It is about all governments whose debt is moving into the high-risk area. Ireland, Portugal, Spain, Italy, USA.

If there is no set of rules, who do creditors turn to? The UN? If there is no overseeing final authority, what happens to international debt obligations? What happens to currencies and their value? After all, they are an extension of nation's creditworthiness. We live in a world of change, even moral change.

Morality often gets trampled in the need of the moment. When different moralities clash, the gravity of decision-making goes to the one with the most power. At the moment, power lies in the hands of the Greek Parliament and they have to rule on the 21st of June. 

If they choose not to support Papandreou, then they will trigger a chain of events that will have considerably more impact than simply the Greek balance sheet and government funding:

  • The government and civil service will face bankruptcy, as will all dependent services. A 'snap' election will surely follow.
  • Greece may well be forced to impose Exchange Controls almost immediately to prevent capital (what's left of it) from leaving the country. 
  • They will have to turn to the Drachma with a two-tier currency system, one for trade and one for capital (at a hefty discount for those putting money into the country and at a huge premium for those wanting to take it out). With such a cheap currency, they will see a tourist boom like they've never seen before, as Greek prices, in other currencies, dive.
  • European banking will reverberate with the blows a default causes.
  • The Euro itself will fall like a stone. 
  • The debt crises of the other European debt-distressed nations will be infected by the Greek scene and likely follow suit as creditors press for repayment. 
  • The EU will have to decide its own future and their membership, but more and more potential loans will dry-up in future. 
  • It may even be that the EU eventually has only the northern, more prosperous nations as members, with a significantly stronger Euro than at present.
  • The US battle over the raising of debt ceilings will be taken in a much more serious light and when the game of 'chicken' reaches its crescendo in early August, the markets will react far more strongly than at present. 
  • Should politics continue to be given a higher priority than debt obligations in the US into August, then the consequences to the entire monetary situation will be dire. 
  • Debt-distressed States will battle for Federal support.
  • A double-dip recession in the US will almost certainly follow. 

The loss of confidence will fragment global banking and international financial support, creating a far more volatile global financial situation. 

Future global growth will be the casualty.

The first major consequence will be that currencies will cease to measure value. With the two major currencies, the Dollar and the Euro, having lost their reputation, other currencies (for the sake of their international trade competitiveness) will lower interest rates and do whatever they can to keep their exchange rate low, despite their good name. 

Hence, currencies will become a needed means of exchange with uncertain value. This will bring exchange rate volatility that may in turn have a detrimental impact on global trade. Deflation will frequently become a feature of nation's economies. 

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JULIAN PHILLIPS – one half of the highly respected team at – began his career in the financial markets back in 1970, when he left the British Army after serving as an Officer in the Light Infantry in Malaya, Mauritius, and Belfast.

First he worked in Timber Management and then joined the London Stock Exchange, qualifying as a member and specializing from the beginning in currencies, gold and the "Dollar Premium". On moving to South Africa, Julian was appointed a macro-economist for the Electricity Supply Commission – guiding currency decisions on the multi-billion foreign Loan Portfolio – before joining Chase Manhattan and the UK Merchant Bank, Hill Samuel, in Johannesburg.

There he specialized in gold, before moving to Capetown, where he established the Fund Management department of the Board of Executors. Julian returned to the "Gold World" over two years ago, contributing his exceptional experience and insights to Global Watch: The Gold Forecaster.

Legal Notice/Disclaimer: This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold Forecaster/Julian D.W. Phillips have based this document on information obtained from sources they believe to be reliable but which it has not independently verified; they make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster/Julian D.W. Phillips only and are subject to change without notice. They assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, they assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this report.

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