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If Greece defaults as a nation, the Greek government will not be able to convince anyone other than governments or international institutions to loan them money. In other words, the private sector will not lend them money (buy their bonds) at face value. And politicians in most other nations will find hoardes of screaming constituents at their door if they start sending money to Greece.

The Greek government will then get along without borrowed money, so government handouts will reduce and those Greeks used to living on them will seek income in the private sector.

With what will be a motivated, i.e., hungry, workforce, newly willing to work, Greece will become a nation sporting some attractive business development opportunities. While some may dejectedly wait for government handouts, some will hustle around and try to look for opportunities to earn in the private sector. Life will simply go on for citizens, albeit with a much higher work/pay quotient. Selling apples on the corner, digging ditches, fixing old shoes and selling them, many new industries will appear as people struggle to survive. The sooner they set up a reasonable free market economy, the sooner they can start accumulating real wealth and increasing their standard of living based not on government borrowing, but on their own productivity.

Large banks in other nations who hold Greek bonds will take a huge haircut on them, getting paid little or nothing as they try to sell them for what cash they can get. Investors around the world (including pension funds, mutual funds, etc., via various private fund mechanisms) will come in and buy up the Greek “junk bonds” from the large banks, some of which will then be insolvent (as losses are written off on those bonds (assets) and the banks’ assets become worth less than the total of their liabilities) while others will manage to survive.

Large banks that go bankrupt will mostly be chopped up and have their assets sold off for pennies on the dollar (a la Lehman) and employees and creditors will be paid to the extent possible by the bankruptcy administrator. The large banks will be located in various nations around the world.

The other PIIGS nations will be hit kind of hard, because inevitably some of the large banks that are buying THEIR government bonds won’t exist any more, so they’ll stop lending money to those nations. Some or all of those nations will then wind up defaulting on their bonds, triggering the bankruptcy of other large banks.

As each large bank collapses, however, their assets will be bought up at very cheap prices by other banks. It’s like buying your neighbor’s second car, a 2005 BMW 5 series, in excellent condition, that he just finished paying off, and only paying $7,000 cash because he’s going bankrupt and needs cash. You just increased your net worth by a few thousand dollars because you only paid 7k but the car is worth say $12k to $15k.

As smaller banks are deluged with new customers who need to make their final withdrawal from their bankrupt bank and then open an account at another bank, they find they can easily hire bank employees to handle the work, because thousands of employees from the bankrupt bank are looking for a job.

After a few years, most of the big banks have gone under and the losses on owning all the worthless government bonds will be written off by their owners.

Populations of nations will be very un-warm to the idea of their government borrowing/issuing bonds.

The school marm of economic reality will have cracked our knuckles with a ruler - hard - to drive home the point that governments should do little to no borrowing, as it is highly addictive and never ends well.

The U.S., of course, is headed for the same natural austerity. How hard we crash is, of course, dependent on how much more we create a legal environment that makes entreprenuerialism increasingly difficult and how much more we allow our governments to spend on employees, contractors and “seminars”.

Perhaps it will help to remember, it’s not a “ghetto”, it’s a pre-re-development.