How Will Greece Default? Let Us Count The Ways

What was once anathema has become conventional wisdom, and lately the only question when discussing the fate of Greece is not if but when it will default. Actually, there is another question: how? Because as the following UBS flow chart shows, when it comes to the matter of picking an obligation on which to not make a payment, Greece has a truly 5 star menu selection.

 

Ths is what UBS says:

We do not believe that Greece will leave the euro in our base case scenario. However, were it to happen, we think it would probably do so via one of two main routes:

(1) The fast route: A rapid deposit withdrawal from the banking system, if the Eurosystem refused to finance it through expansion of the ELA facility. The government would then need to refinance (and probably recapitalise) the banking system by creating a new currency to do so. However, this could probably be slowed with the imposition of capital controls limiting deposit withdrawal.

(2) The slow(er) route: The government, running out of funds, could substitute IOUs for euros in some of its payments. Starting with payments to suppliers (including for pharmaceuticals, as in 2011), and then – in theory – progressing on to public sector salaries and pensions over time. As current Greek debt obligations are not valued at their face value by the bond market, nor would these notes be, meaning that their purchasing power would likely be lower than that of the euro. In this way, the parallel currency would already be devalued.

The more of these notes that were issued, the greater the need would be for the banking system to clear payments in them. The need would also increase for businesses and citizens to use them to pay taxes. As this continued, it would be likely that more euros would leak out of the Greek banking system and the economy would rely on the new currency to a greater extent.

Nominally, Greece could (in theory, and just conceivably) remain in the euro under these circumstances, but there would come a point in this process at which it had in a practical sense already left.