May 1, 2011

Sovereign default predictions again on the rise

Confidence in Greek Finances now linked to confidence in the EU

It's never gone away during any stage of the eurozone/IMF bailout on Greek government finances, but the idea of a Greek sovereign default is again all over the financial world. (And the future for the eurozone in general is tough, with ministers lining up how to bail out Portugal without using the word 'bailout': see the Irwin Stelzer Wall Street Journal for "The Euro Zone Has Little to Smile About").

Felix Salmon at the Reuters blog "A slice of lime in the soda" predicting it is inevitable that Greece must default, or at least restructure in a manner that's barely different from default:

"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."

For a brief but to the point examination of the call for extended payments which has come from Greek Finance Minister Georges Papaconstantinou, there is Douglas A. McIntyre at Wallstreet 24/7 online:

"The Greek government has begun to float the trial balloon of a lengthened period over which it repays its 110 billion euro bailout loans. Greek Finance Minister Georges Papaconstantinou once again ruled out a default or restructuring of his nation’s paper. He claims it would hurt the debtholders as much as it would hurt Greece, which is probably true. A number of European banks are believed to hold large holdings of Greek sovereign loans.

What the Greeks have not admitted is that default could be broadly interpreted to include a extension of the time over which it covers its EU and IMF obligations. Creditors who expect a fixed sum of money in the future will not receive that on the current repayment schedule. Greece would argue that its debt will be repaid in full, but a debt rescheduled is a debt in default, particularly if those due money have no say in the matter. "

More to the point, financial people are asking why Greece is going down such a slow, tortuous road to only have to default at the end of it? Brian Milner at the UK Globe and Mail is asking that question:

"Some things in life are simply inevitable: The NHL will abandon its failed experiment in the Arizona desert; Fed chairman Ben Bernanke won’t tell us anything we don’t already know at his historic first press conference; and Greece will restructure its debt.

As for the Greeks, the only question is why is something so obvious taking so long?

Greece, like Ireland and Portugal, is insolvent. If it was a corporation, the bankruptcy experts would have called in the secured creditors long ago to inform them that the only way to avoid liquidation was to accept extended terms on their loans and maybe 30 or 40 cents on the dollar at the end.

Instead (not unlike the NHL in Phoenix), the Greek government and its lenders of last resort, the EU and IMF, have opted for a much slower and more agonizing process that is causing considerably more pain for the Greeks and unnecessary uncertainty in the markets."

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