Greece vs Puerto Rico as well as what's systemic.

How is a Greek default unlike from a Puerto Rican default?

Answer: because Puerto Rico doesn't direct maintain its ain banking system. It can't close downward banks. Banks inwards Puerto Rico are non loaded upward on Puerto Rico debt , then depositors are non inwards danger if the province authorities defaults.

Puerto Rico , similar Hellenic Republic , uses a mutual currency. But at that topographic point is no interrogation of PRexit , that people wake upward ane morning time in addition to their dollar banking concern accounts are of a precipitous PR Peso banking concern accounts. So they direct maintain no argue to run in addition to larn cash out.

Banks inwards New York are besides non loaded upward on Puerto Rico debt. U.S.A. banking concern regulators haven't said that those banks tin sack pretend Puerto Rico debt is gamble free.

If a Puerto Rican banking concern fails , whatsoever large U.S.A. banking concern tin sack speedily accept it over in addition to proceed it running.

Influenza A virus subtype H5N1 Puerto Rican authorities default volition live a mess. Just similar the default of a large concern inwards Puerto Rico. But it volition non hateful a banking concern run , crisis , in addition to economical paralysis.

So hither is a large lesson of the Greek debacle: In a currency matrimony , sovereign debt must live able to default , without shutting downward the banks , simply every bit corporations default. Banks must non live loaded upward on their country's sovereign debt. Bank rule must process sovereign default simply similar corporate default. It tin sack come about , in addition to banks must diversified in addition to capitalized to endure it.  Banks must live complimentary to locomote across borders.  A mutual currency needs a theatre commitment that it volition non live abandoned.

In financial rule , the large fence rages over what is "systemic ,"  with the latest absurd persuasion to extend that designation to equity property managers. (More later.) All that tidings starts amongst statements that  sovereign debt or anything backed past times sovereign debt or sovereign guarantees is prophylactic in addition to per se non "systemic." Sovereign debt all the same counts every bit gamble complimentary inwards nearly all banking regulation.

Hellenic Republic should reinforce the lesson: Sovereign debt is a prime number root of "systemic" danger. That is peculiarly truthful of small-scale governments inwards a currency union. Influenza A virus subtype H5N1 authorities is simply a highly leveraged financial establishment in addition to insurance company.

Wrong answers:

- Fiscal union. The U.S.A. is non necessarily going to bail out Puerto Rico. Or Illinois. Or their creditors. People proceed maxim a currency matrimony needs financial matrimony , but it is non so.

- National deposit insurance is actually non cardinal either. The banks operating inwards Puerto Rico are non inwards danger , then they don't postulate deposit insurance protection.

Update: A colleague pointed me to this first-class article on banks belongings their ain sovereign debt past times Lucrezia Reichlin in addition to Luis Garicano.