A Greek default is looking increasingly more likely according to a chorus of economic analysts who feel that their €14.5 billion of debt obligations will prove impossible to pay. The due date is March 20th and the necessary paperwork for a deal with bondholders would take at least 6 weeks to draw up – so the talks must be settled within the fortnight.
As markets begin to factor a Greek default into their long-term plans, they have stressed the importance of an orderly default rather than a catastrophic hard default. Richard McGuire from Rabbobank, has asserted that it has already begun: “People often ask if Greece is going to default which is a misnomer because Greece is already defaulting.” This pragmatic view appears to be percolating around the industry, in contrast to headlines earlier in the week that suggested an agreement was close to being made between Greece and its bond holders.
Greece has hinted that if the deal is not agreed, they will force investors into a bond swap that will leave them with half the original bond value. If this is the case and bond holders are not complicit in the debt write-off, then Credit Default Swap (CDS) pay-outs will be triggered. A CDS acts as a veritable insurance device against company or country defaults; the debt holder pays a series of payments to a hedge company and in the case of default, the debt holder receives a lump sum payout.
The benefit to this method of ‘soft’ default in the case of Greece, is an improved rate of compensation for the Eurozone bond holders; instead of just 50% bond value, they will also receive a cumulative €2.67 billion (according to the Depository Trust and Cleaning Corporation) in CDS payouts.
The general consensus indicates that an orderly default will take place, which will be less damaging to the reputation of Eurozone leaders. A hard default would shock markets and spark fears that the 17-nation bloc was heading towards a collapse; there would be a very high likelihood of contagion spreading to other weak Eurozone countries such as Portugal, Italy, Spain and Ireland.
But even a ‘softer,’ more orderly default could prove to be a fatal blow for the Eurozone; if the ice cracks why would investors stand around waiting to fall in?
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