[A Greece default] would have potentially catastrophic consequences for holders not only of 340bn euros (£300bn) of Greek sovereign debt, but also for holders of hundreds of billions of euros of Greek commercial debt and tens of billions of euros of derivative contracts linked to Greek debts.
The contagion would then spread to Spain and Ireland. The European Central Bank hold more sovereign debt on those three countries than any other institution, which is the primary reason they are screaming the loudest about no writedown on the debt.
But the biggest problem, as always, is the derivative contracts. They can be highly risky, and are opaque and not traded on the open market. The amounts involved dwarf the actual sovereign debts. No one knows who owns what or where the risk is. Hence, this can lead to a liquidity crisis. The banksters of course will whine to governments that they will need more bails out because of all their toxic glop derivatives. Instead of more bailpouts, governments should follow the lead of Iceland and let the banks fail, then arrest the CEOs.
Eurozone finance ministers delay €12 billion in loans to Greece
Europe prepares for Spain failure
Portuguese-German bond spread at new record wide
Moody’s threatens to downgrade Italy credit rating