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Comment by chernevik | Hacker News Reader

You're probably right, they'll make some principal payment, perhaps even par -- but in what currency? If it's drachmas, you're getting a claim on the various things Greece exports. Hence views on the value of greek bonds are increasingly driven by views on the prospects for the olive oil market. After three millenia of maturation, this is now considered a commodity market with little potential for pricing power . . .

P.S. The Germans may, at some point, prefer to bail out their banks, as there they have some capacity to draw a line and call a halt.

The _real_ question is the implications of a Greek default / euro withdrawal on European political integration. The Germans care a great deal more about that, and are probably prepared to pay a very high price for it. The question comes down to, how much of others' welfare states must they underwrite, and how much will they underwrite.

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>P.S. The Germans may, at some point, prefer to bail out their banks, as there they have some capacity to draw a line and call a halt.

I think Germany is loving this crisis. The number it's doing on the Euro has been incredible for their export economy. I suspect they'll do whatever they need to to keep this going as long as possible.

That's about the only benefit they're seeing, and it doesn't compensate for the risk they'll take on when (ultimately) asked to bail out a number of countries.

German politicians or the German people? Last I heard the latter have not been very happy about having to bail out the entire euro sector.

Big German businesses. I suspect that pulls in many of the politicians in as well. Of course most of the people hate it, it doesn't help them at all and their tax money is financing it.

There is no legal basis for kicking Greece out of the euro. None of the relevant treaties have any provision for member states kicking another state out of the monetary union or a member state leaving of their own accord. I think there is a provision for a state to leave the EU, but only of its own accord and not by force, and they'd have to leave the EU not just the monetary union. So if its going to be legal, there'd have to be some amendments made to the treaties.

Of course, Greece could just turn its back on the treaties, ditch the euro, re-instate the drachma, convert all debt obligations to drachmas and go on its merry way devaluing the drachma against the euro. But they would no doubt face retaliation from an angry EU and will likely get hit with stiff trade barriers on Greece exports as punishment (in which case devaluing the drachma would have limited effect).

I think the more likely outcome will be some kind of debt restructuring, a situation where the foreign bondholders (who own almost 60% of the debt) will have to finally face up to their losses.

Restructuring would force recapitalization of national bank systems, and could well force recapitalization of the ECB. It's hard to see how that goes down without a German subsidy.

That's probably fine as a one-off event, but of course this situation is basically writing the rules going forward. And a default / restructuring would also force reconsideration of the "risk-free" status afforded euro sovereign debt by the EBC and national regulators. Actually reflecting risk would introduce yield and liquidity differentials among euro sovereigns, with Germany essentially becoming the benchmark. Ignoring that risk would perpetuate the moral hazard temptations, and under a precedent of Germany underwriting the risks.

So either the euro becomes the deutchesmark, or Germany underwrites the deficit risks of the euro countries. Not easy to see how that gets resolved.

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