How soon might Greece default?
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.