The key message, from my perspective I was reminding last week:
If any OECD state were to default there would be very serious implications:
- The Basle Accord zero risk weight of government debt in Basle Accord calculations would be proved fanciful;
- The assumption of government debt as a liquid asset suitable for bank Tier 1 reserves to meet unanticipated and sudden cash demands will become unsustainable;
- Banks would be forced to recapitalise at much higher levels, forcing even sharper deleveraging and contraction of lending;
- Governments would lose the captive, uncritical investor base they have relied on to finance excess public expenditure for the past 30 years;
- Central banks could be forced to suddenly monetise even more government debt if required to meet the cash demands of a run on their undercapitalised banks.
It will likely prove impossible to reform the bankers and central bankers dependent on the Basle Accords for their business models and careers.