Felix Salmon

How soon might Greece default?

By Felix Salmon
June 2, 2010

I spent most of this afternoon attending a fascinating discussion looking at Greece from the perspective of emerging-market veterans who are used to sovereign debt default and restructurings. There was quite a lot of consensus on the panel, and not in a good way: everybody agreed that the bailout of Greece was only postponing the inevitable, and many people reckoned that it wasn’t going to postpone it very long: one pair of hedge fund managers in the audience reckoned that it would last about six months before the default finally happens.

The form of the default, too, seemed pretty clear: an act of parliament in Greece would do most of the work, given that most Greek debt is issued under Greek law. It will be a par exchange — the new bonds will have the same face value as the old bonds, but with lower coupons and extended maturities — so that with a bit of accounting fudgery, no banks would need to mark their Greek debt to market and take a huge loss. And Greece, in a fiscal bind, will probably at some point start issuing its own scrip alongside the formal national currency of the euro, much as California did in 2009.

Most surprising to me was how mainstream Adam Lerrick seems to be these days. He was making a lot of good points, including a simple extrapolation showing that if Greece continues on its present path through 2012, the EU and the IMF are going to end up owning more than half of all Greek debt by the time the current program comes to an end. At that point, with Greece’s debt-to-GDP level somewhere around 150%, the country still won’t have access to private markets, and therefore the only alternative to default would be to essentially remain a ward of the multinational community more or less indefinitely.

Whether or not Greece defaults is in Greece’s hands, and Greece itself will be hurt much less badly by a Greek default than the rest of Europe would be. So a default is still inevitable, I still think. It won’t happen during the World Cup. But once that’s over, it might happen any time — and Europe will respond by turning its liquidity firehose on the Spanish banks, to try to contain the problem. You never know, it might even work.

9 comments so far | RSS Comments RSS

Your throwaway about the World Cup struck me as odd at first. I mean, Greece might have to beat Argentina to make the third round and, well, you know how screwy things between non-AAA rated countries can get…

But then I got to thinking, maybe we could have the teams all going into overtime, air extended slo-mo reruns of little girls in figure-skating leotards for a month or two after elimination occurs. See if that works.

Posted by HBC | Report as abusive

I think Greece *has* defaulted. Economists use the word *default* in more than one senses. Strict default, and broader default.
From your post I think this has (once again) more to do with how banks will hide their losses.
I am sure Greece will not be the ward of anyone. All nations are much too busy with the mess they have created to be watching over anyone.
The Greece story also has a lot to do with Germany and its export based economy (and its use of bribery, see Siemens)

Posted by Mike13 | Report as abusive

Good to see that Plan A (the official course) is recognised as impossible. The two alternatives are Plan B (return to drachma) and Plan C (keep the euro and tolerate quasi-currency emission). The trouble with Plan C is that it requires increasingly stringent trade and financial controls, in order to achieve an administrative devaluation (i.e. import duties and export bounties). That way madness lies, but it has been tried before: by central Europe in the Great Depression. Let us all hope that Athens plumps for Plan B and remains an open member of the world trading system.
–Kunshan (http://open-thinking.com)

Posted by Kunshan | Report as abusive

Interesting post. I am intrigued by Adam Lerrick’s observation about the implications of a simple extrapolation of the present path. Did he mention that the Greek deficit for the first 4 months of the year was 41% lower than last and so the country is on course to reduce its deficit to 7-8% of GDP from 13% in 2009. With more reforms being enacted, it looks like Greece has seen an inflection point and is on track to meet the IMF/EU deficit reduction targets.

So I suppose the second question is whether once Greece has acheived a budget balance, will it then default (as it does not have any immediate financing needs). However whether they do this, according to a colleague of mine, depends on a ‘complex cost-benefit calculus involving political and social considerations, not just economic and financial ones. Most country defaults happen long before a nation literally runs out of resources. In most instances, with enough pain and suffering, a determined debtor country can usually repay foreign creditors. The question most leaders face is where to draw the line.’

I think that this cost benefit analysis for the Greeks will be skewed by the fact that they would be defaulting on their EU colleagues countries that they have an element of shared nationality with. To draw a US parallel, California State would think harder about defaulting on a loan from Arizona State than on a loan from a commercial bank.

Posted by CharlesC | Report as abusive

greece wont default because the EU wont let them. the domino effect would be catastrophic. deciding to default would basically mean they are deciding to leave the euro because none of the other member states will put up with that outcome. they’ve shown that clearly with the bailout funds they have committed even though their own economies are in no position to be bailing out anyone.
Greece will just stagger along as a horribly indebted country who cannot borrow on the private market and is dependent solely on the sufferance of their fellow E.U states. whether they decide to go along with that indefinitely is up to them, their basic choice may be to end up being the whipping boys of europe and holding on to the euro, or defaulting and striking out on their own with the drachma.

Posted by sparhawk | Report as abusive

Greece will default within a time-span defined as an inverse function of the number of comments/suggestions that it will/does so. The limits of that function, however, are the number 110 in billions: i.e. the package put in its disposal by the EU on the one side and the euro-parity value that exporting European countries might find appropriate on the other side. In the middle of course stands financial logic the default of which has long being recorded but ordinary citizens will manage -again – to bail out.

Posted by Y-patia | Report as abusive

Another Jew thinking very much of himself and his stupid opinions…so, Mrs Pythia, why dont you tell us who will win the World Cup? I am a poor greek who needs some money DESPERATELY! Please, tell me your guess so that I put all my money on the winner! And please….ger a woman to lay down because the lack of S@x is obvious!

Posted by thymi | Report as abusive

So, Greece will default after the world cup, just to keep football fans happy and spend their euros, dollars or whatever in south Africa. There is a point in that deep analysis. I mean, imagine Greece defaults tomorrow, that means that a large portion of funs will not travel to South Africa because they will be to busy selling stocks and converting euros to dollars. So that in turn will mean the collapse of South African economy and mpla, mpla, mpla…
I just wonder what sort of milestone in the world cup to global economics. Please give us a brake…..

Posted by brookeGreek | Report as abusive

In first place Greece was created indebted back in the 19th century! Westerners indemnified the Ottoman Empire with the sum of 40,000,000 piastres in gold for the loss of the territory, then followed the first and the second (£2,400,000) “Greek” loan, and so on…

The problem appeared under the surface many times during the short Greek history when the creditors asked their money and interests back, and was always solved in the worest manner – violence, wars, military coups, ban from Europe …

People have short memory and always forget that the history repeats!

The diference this time is in the amount of the accumulated debt – 2625 billions of euros, according to Lombard Odier, a Swiss bank ( http://www.globalresearch.ca/index.php?c ontext=va&aid=19527 ).

…more people, more needs, much more debt!

Posted by Basilski | Report as abusive

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/