It is no longer a question, according to many, whether or not Greece will default, but what happens after it does. Moreover, default is expected soon.

Greece is supposed to get a payment from the IMF/ECB/EFSF agencies this month. For most, if not all, of these financial institutions though Greece probably has not met the necessary conditions for receipt.

Greece admitted today that it only has cash for expenses through early October.   This post-default issue is being called “the day after” problem, after the notion “What happens the day after Greece does not make a debt payment?”  The questions and issues related to the “day after” problem are: 

• What happens to the pricing of new Irish, Spanish, Portugese, and Italian debts?

• Will all potential debt buyers other than the IMF, ECB, EFSF, disappear?

• If so, then these countries will be unable to sell new debt, which probably means an immediate recession in these countries and probably the Eurozone.

• What is the US and non-European exposure, directly or indirectly, to Greek debt default? Direct exposure is through ownership of Greek corporate, financial, or sovereign debts. Indirect exposure is, say, through ownership of DeutshePostBank debt, which owns a proportionally large amount of Greek debt-as the Greek debts go then so goes the DPB debts.

• To what extent will American bank capital positions (improved over 20077) cushion this blow? 

Equities, since they involve more risk than cash, high grade US bonds, Treasuries, and other like assets, will likely take a big hit on the day after a Greek default. Non-risky assets will take a hit also, just not as much.  

If Greece defaults in an orderly manner, will Ireland, Spain, Portugal, and Italy, as well as France, become more fervent, and more realistic, about raising revenue and cutting expenses? The degree of success of such efforts will depend on the current financial condition in each of these countries, the amount of time they have to impose more fiscal discipline, and the maintainance of social order.  

If the Greek default is not orderly, expect panic by debt holders of these other countries and big declines in their equity and bond markets, along with a concomitant bigger effect on US asset prices. Panic here does not necessarily mean riots; but it will imply “I want to sell at any price” financial transactions. 

Any default will vastly reduce the current uncertainty surrounding Greece.  However, will it increase the uncertainty surrounding other, above listed, Euro countries?  Will it increase the uncertainty in America and further delay an economic recovery? 

Any repairs to Greece’s fiscal position will take years and be a huge cultural shock to the Greek people. How much additional time will a Greek default add to accomplish the repairs to US, global balance sheets? 

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The answers to the foregoing questions, my friends, are blowing in the wind.  Nevertheless, it would be willfully stupid not to take a lesson now from the Greek welfare state.  

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Updates:

Greece to Miss 2011 - 2012 Deficit Targets

Government of Greece Passes Huge Property Tax Increase - Barely

Government of Greece to Place 30,000 State Workers in Reserve at 60% Pay 

Bondholders Face 50% Haircut in 2012

A Default In All But Name

March 2012 Greek Debt Default Reality Check

Not a Hair Cut; A Head Cut