Greece Perilously Close To Default

Greece is within a day of a catastrophic default the ripple effects of which could put immense pressure on other troubled eurozone nations, particularly Portugal. The government has been told by its eurozone neighbors that if the country’s Parliament cannot agree to onerous austerity measure that the group will abandon Greece, probably to a national bankruptcy of sorts.

Greece still does not have a final agreement with private debt holders which have been asked to take a 70% reduction in the value of their bonds. A default would likely drive this paper’s value to zero, which could, in turn, severely damage the balance sheets of a number of eurozone-based banks. Greece’s own banks are close to insolvency, and most hold a great deal of Greek debt.

There is a debate as to whether a Greek default would cause global capital markets investors to abandon the paper of other countries which are in substantial financial trouble–particularly Portugal. This would drive their borrowing costs to unsustainable levels

Greece’s situation is exacerbated by the fact that the IMF’s plan to add 500 billion or more euros to its war chest has not happened yet. The size of the The European Financial Stability Facility (EFSF) is not large enough to handle a set of serial collapses of sovereign debt. The permanent European Stability Mechanism (ESM) has not been put in place yet, and even it it were, many experts think its capital base would have to be close to $1 trillion if it had to rescue Portugal, Spain, and Italy.

The ECB, which might be the last line of defense for Greece, has said it is not in its charter to buy sovereign debt, although it has created tremendous liquidity in the market through its loans to eurozone banks. Those banks, in turn, have bought area sovereign debt. But, if ownership of that debt becomes more risky, financial firms may abandon their programs.

Greece may be in default by this time tomorrow.

Douglas A. McIntyre