MercoPress. South Atlantic News Agency

Greek default would expose European banks in 300 billion Euros

Minister Venizelos trying to avert an Argentine collapse scenario

History's first sovereign default came in the 4th century BC, committed by 10 Greek municipalities. There was one creditor: the temple of Delos, Apollo's mythical birthplace.

Twenty-four centuries later, Greece is at the edge of the biggest sovereign default and policy makers are worried about global shock waves of insolvency by a government with 353 billion Euros of debt -- five times the size of Argentina's 95 billion dollars default in 2001.

“There is a monstrously large amount of uncertainty and a massive range of possibilities,” said David Mackie, chief European economist at JPMorgan Chase & Co. in London. “A macroeconomic disaster could be averted but only by aggressive policy action by central banks and governments”.

After two international-bailout deals, three years of recession and budget-cutting votes that almost cost him his job, Greek Prime Minister George Papandreou says throwing in the towel now would be a ”catastrophe.“ Potential consequences of a national bankruptcy include the failure of the country's banking system, an even deeper economic contraction and government collapse.

The fallout may echo the days following the 2008 implosion of Lehman Brothers Holdings Inc. when credit markets froze and the global economy sank into recession, this time with the prospect that the 17-nation Euro zone splinters before reaching its teens. The International Monetary Fund, whose annual meetings start in Washington Friday, reckons the debt crisis has generated as much as 300 billion Euros in credit risk for European banks.

Credit-insurance prices on Greece indicate the chance of default at more than 90%. Investors can expect losses on Greek debt of as much as 100%, says Mark Schofield, head of interest-rate strategy at Citigroup Inc. in London.

”People, justifiably, think the crisis is what we're living now: cuts in wages, pensions and incomes, fewer prospects for the young“ Greek Finance Minister Evangelos Venizelos told reporters in Athens. ”Unfortunately this isn't the crisis. This is an attempt, a difficult attempt, to protect ourselves and avert a crisis. Because the crisis is Argentina: the complete collapse of the economy, institutions, the social fabric and the productive base of the country.“

Even if Greece receives its next aid payment, due next month, default beckons in December when 5.23 billion Euros of bonds mature, said Harvinder Sian, senior interest rate strategist at Royal Bank of Scotland Group Plc.

”It's too late for Greece,“ Howard Davies, a former U.K. central banker and financial regulator, told ”Bloomberg Surveillance“ with Tom Keene and Ken Prewitt. ”The Greek situation is tumbling out of hand and I suspect Greece will not be able to avoid a substantial default.“

The introduction of the Euro and global financial connections mean previous Greek defaults in the 19th and 20th century, most recently in 1932, doesn’t provide a decent precedent for a failure to satisfy lenders now.

”Contagion will be violent“ as the price of the two-year Greek note tumbles below 30 cents per Euro from about 65 cents now, predicts Sian. The European Central Bank would be the first responders through purchases of government debt, he says.

The country's banks, of which National Bank of Greece SA is the largest, would be the next dominoes. They hold most of the 137 billion Euros of Greek government bonds in domestic hands, a third of the total and three times their level of capital and reserves, says JPMorgan Chase.

As those bonds are written down and equity wiped out, banks would lose the collateral needed to borrow from the ECB and suffer a rush of withdrawals that likely triggers nationalizations, said Commerzbank AG economist Christoph Balz.

”No banking system in the world would survive such a bank run,” said Frankfurt-based Balz.