Greek Default Is Inevitable - So The More Preparation, The Better - Coutts Commentary

Tom Burroughes

28 September 2011

With Greek default on sovereign debt more a question of when, not if, investors and policymakers must prepare for the event and handle it in as orderly a way as possible, Coutts, the UK private bank, said in a note on the eurozone crisis.

The chances of Greek default are “very high” and it will become evident by the end of this year or the spring of 2012 that the country cannot make the reforms needed to contain its debt, Carl Astorri, global head of economics and asset strategy, said in a regular note.

“The time will have come to impose substantial haircuts in the order of 50-70 per cent on Greek bondholders, rather than the roughly 20 per cent currently being implemented under the private sector involvement programme,” he said.

The broader impact of a default depends on how the process unfolds, he said, arguing that an orderly restructuring might “go a long way” to restoring confidence in the wider eurozone. On the other hand, a chaotic default could “mark the beginning of a new and even more violent phase in the European debt crisis”.

Astorri said orderly restructuring needs to be planned in advance and over several months; the European bailout fund – EFSF – must be ratified by EU states, created and put into operation, while the Greek banking system must be kept afloat and recapitalised.

Furthermore, a relatively benign default would require the European Central Bank to continue accepting Greek debt as collateral and lending liquidity against that debt, Astorri said. Also, other European banks need to have plans in place to be strengthened, he said.

“Even with all of these conditions in place, there would still be a chance that events could spiral out of control and lead to a disorderly default. The ECB’s role is particularly critical, as it will need to be both a provider of liquidity to the Greek banking system and part of the firewall protecting other eurozone sovereign bond markets,” he said.

“A disorderly default could happen if the Greek banking system was left to fend for itself, or if policy-makers are unable to put a firewall between Greek and other eurozone sovereign bond markets. Another risk is that civil disorder becomes so great as to precipitate a default,” Astorri said.

“The contagion impact of a country leaving the single currency would be enormous. It would likely lead to flows out of other periphery eurozone banking systems. The risk of civil disorder in Greece and other countries would also be high,” he added.