What happens when Greece defaults?

For months now, the European Union and the IMF have been grappling with Greece’s unmanageable debt and economic bankruptcy — to no avail. That failure has already precipitated panic runs on banks in Greece and Spain. It is looking more and more likely Greece will default and may even exit the Eurozone entirely.
But what does that mean?
We know what happens when individuals in the U.S. declare bankruptcy: debts are wiped clean, but at the cost of the individual’s inability to secure future loans and credit. Is that also what happens to entire countries that default?
Simply put, “default” means that a country tells its creditors it won’t be making any more payments on its debts.
Financial Times has an interactive graphic that attempts to answer that question by describing the likely consequences of a country defaulting. Here’s the flow-chart (click chart to enlarge):

You can also see a break-down of the flow-chart and listen to an accompanying audio by going on the FT website. Click here!
For readers who prefer an outline text approach instead of a flow-chart, here are the consequences of Greece defaulting on its debt:
1. New lending to govt stops → govt cannot pay its bills → economy stalls; govt employees lose their jobs; streets explode in protests and riots → eventually new loans are secured.
2. At the same time, the value of Greece’s govt bonds plummets → Greece’s banking system faces collapse → eventually new loans are secured to shore up the banks.
3. The fear and possibility is that Greece’s default will be contagious, resulting in the fall in value of the govt bonds of other Eurozone countries, as well as a collapse of non-Greek banks.
I’m now thoroughly confused. From the flow-chart, it appears that whether a country defaults or not, the eventual result is the same:

New Loans

But that’s exactly what the Eurozone (in reality, Germany) has been doing with Greece — extending new loans to shore up that country — which has only succeeded in “kicking the can” further down the road.
Can someone explain this better than I (or the FT flow-chart) can?
~Eowyn

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walthe310
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Yes, I can. The banks take a licking and the people of Greece keep on ticking. For a recent example, please see Iceland.

DCG
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I can’t explain it any better. Whatever happens, it will not be good, IMO.

dan
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dan

I hear they left the EU a parting gift of a really big wooden horse

Richard T. Fowler
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Eowyn, What you are thinking of as “money” for loans to Greece is not really money. It is counterfeit. Is a counterfeit dollar a type of dollar? Is it “really” a dollar? Or is it not a dollar? A counterfeit dollar goes in which category: 1. Things which are a dollar. 2. Things which are not a dollar. Assuming you will say #2, the next question is why I say that banks are lending counterfeit. What makes me say that? To answer that, you have to know what a currency is. What property distinguishes something that is a form of… Read more »

Alice Wolf
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Here’s my tuppence worth. The new leader of the political party that is putting it’s foot down and saying “No” to the austerity measures that the Troika want to impose on the Greek people, is saying that the cuts etc. must be rolled back. Why? Because the Greek citizens are literally dying……………………they cannot survive on thin air. The rules that were imposed on Greece when they were accepted into the EU were totally ruinous for the most part for that country. First of all, their sovreignty was taken away, just like all EU countries, which meant that they couldn’t utter… Read more »

Richard T. Fowler
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Alice, the “quadrillions” of “debt” and the chaos it portends is not real in the sense of being unavoidable. Think of it as 2-dimensional theater scenery. Its only purpose is to give the appearance of an insurmountable problem, so that E.U. member states will give up the last vestiges of sovereignty that they have … including, particularly, the power to issue money and call it legal tender. I.e., the power to issue a currency. Contrary to what you have stated, Greece and Germany and the U.K. and everyone else in Europe still has that power. They just haven’t chosen to… Read more »