Expecting an early Greek default

April 20, 2011
Reuters poll of 55 economists from across Europe: 46 of them saw a restructuring in the next two years, with four saying it would happen in the next three months.

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Greece is going to restructure its debts — and it’s going to do so before mid-2013. That’s the clear message sent by the latest Reuters poll of 55 economists from across Europe: 46 of them saw a restructuring in the next two years, with four saying it would happen in the next three months.

This is a major development. The markets haven’t believed Greece for a while — but now they don’t believe the European Union, either. Remember that back in November, the EU put out a statement laying out a mechanism for restructuring a member’s debt “in the unexpected event that a country would appear to be insolvent”. It clearly says that “any private sector involvement based on these terms and conditions would not be effective before mid-2013″.

But almost nobody believes that Greece can last that long any more. Landon Thomas has the story:

All of which reflects an emerging view, although it has not yet been officially stated, that it makes little economic sense for the monetary fund and the European Union to keep lending money to Greece so that the government can pay back private investors at double-digit interest rates — especially as Greek citizens suffer the effects of a severe austerity program.

“Behind the curtains, they are looking for a smooth restructuring,” said Theodore Pelagidis, an economist in Athens and the author of recent book on the Greek economy’s collapse. “The basic reality is that we cannot service our debt.”

A smooth restructuring, however, is going to be all but impossible to achieve. For one thing, the EU’s preferred mechanism for such things — the use of standardized collective action clauses — isn’t going to be in place before 2013. And more generally, as Lee Buchheit and Mitu Gulati show, there’s no easy way of restructuring Greece’s debts.

Buchheit and Gulati reckon there are two ways that Greece could restructure before 2013; they call the two scenarios “A Light Dusting” and “The Full Monty”. The former option would be something along the lines of a reprofiling: Greece would extend its maturities, but keep its principal obligations untouched. The problem with this kind of deal is that it’s not worth the trouble: the EU would have to go back on its promise, and Greece would publicly default on its bonds, all in the service of a restructuring which would be clearly inadequate, and which wouldn’t actually decrease its debt-to-GDP ratios at all. There’s no possible way that a light dusting could bring Greece to a position of sustainability, so it’s hard to see why they would bother.

On the other hand, the “Full Monty” approach doesn’t look very likely either. Here’s Buchheit and Gulati:

Having spent billions of Euros of taxpayer money to stave off any restructuring of Eurozone sovereign debt, will the political class in Europe really be prepared now to careen to the other extreme of countenancing a savage debt restructuring?

A major tremor of this kind affecting the Greek debt would indeed be felt in Lisbon, Madrid and elsewhere in peripheral Europe.

So maybe Simon Nixon is right, and Europe’s economists are wrong, and Greece won’t restructure before 2013, since doing so “would be a recipe for chaos”. The question, I guess, is whether Europe’s politicians are capable of acting in concert to avert such chaos. The consensus right now seems to be that they’re not.


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