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Tuesday, March 06, 2012

IIF on a disorderly Greek default

A leaked document from the Institute of International Finance (IIF) has been doing the rounds recently and has some rather alarming statistics regarding the cost of a disorderly Greek default in it (see here for full doc). The document is well worth a read if not just because it sheds some valuable light on the thinking inside an institution which, up until the few months ago, very few people had any knowledge of.

As far as we’re aware the doc was first released by Athens News (we’ve done an interview with them presenting our thoughts which we will post in due course), but for now see our initial thoughts on the claims that a disorderly Greek default could cost as much as €1 trillion:

- The IIF does have a vested interest in seeing the current plan succeed and has played a substantial role in negotiating it, which should be kept in mind when reading their analysis of the ‘alternative’ of a disorderly default.

- As our latest report on Greece highlights, the current plan for Greece does not actually decrease the prospect of a disorderly default. It offers little real debt reduction and simply transfers the debt from private to public sector (making any future default more costly for taxpayers). If anything then, the warnings in the IIF report could also be a read as the potential consequences of the current path of action which risks shifting the cost of a disorderly default further onto taxpayers – the consequences of which could be hugely problematic for Europe and the global economy.

- A disorderly default is the worst case and would be incredibly painful for Greece and the eurozone, however, to present it as the only alternative to the current plan is misleading. This is a diametric choice engineered by the EU/IMF/ECB and even the IIF. There is still the option of a managed restructuring offering a greater write down with a simpler process and therefore better value for money than the current plan.

- The document mentions the social cost of a disorderly default, which would be very high, but the IIF and the troika continue to ignore or just accept the social costs of the current plan. The massive austerity threatens to create a downward spiral in the economy, while the riots show a glimpse of the tensions simmering underneath the surface in Greek society.

- There is much discussion of contagion but there has been little thought given to the potential knock on effects of the current plan, from aspects such as the legal gymnastics to protect the ECB to the lack of a comprehensive solution.

Does this document, then, simply constitute scaremongering on the part of the IIF?

That may be going a bit far, but as we point out above there are certainly caveats to consider when examining their estimates. The key point is that the current plan simply kicks the chances of disorderly default further down the road, beyond the end of this year at best. However, at that point, the potential for dire consequences of a disorderly default set out in the IIF report, will not have gone away.


Denis Cooper said...

"Does this document, then, simply constitute scaremongering on the part of the IIF?"

Yes, and carefully timed scaremongering.

johno said...

Why is a disorderly default a worst case? The EU/IMF/ECB want to transfer the debt from the private to the public sector (bail out the foolish and failed investors by transfering their bad debt instruments to the Greek taxpayers) at the same time cutting social services, wages, pensions, and education. How could it be worse than that?

This taxpayer bailout worked in the US but the Greek people won't let it happen to them.

lojolondon said...

I think this is nonsense - remember Y2K, that would throw the world into turmoil? It went just fine. Germany changed from the DeutschMark to the Mark to the Euro. So what. These people are afraid of the effect on the banks and governments that have been FORCED to lend to Greece, they will lose ALL their money, and that is where the damage occurs.

Open Europe blog team said...

Thanks for the comments.


The main concern is that under a disorderly default there are huge unknowns. Greece would likely be forced to exit the eurozone and while running a budget deficit it would still have to enact similar austerity measures to the ones seen now. All disorderly defaults in history are also associated with social upheaval and unrest. Much of the banking sector and other private industries would have to be nationalised, thereby performing the transfer to taxpayers in any case. That’s not to say the current plan poses no risk, since we have at length discussed the costs of the current plan, but there needs to be a balanced and informed discussion of the costs of the different alternative. There are other options between the two extremes which could present a managed alternative and better value for money for everyone.

Rik said...

Utter rubbish imho.
We have 200 Bn private debt, half or so with Greek banks and financial institutions. The majority apparently willing to take a 70% (approx) haircut. Prices indicating a 90+% probability of a haircut and/or default. 1 Tn. simply doesnot make any sense.
Especially the 90+% priced in. These are basically the same people that own other PIIGS debt why would they not have priced that in, in other PIIGS bonds, and only in Greek ones. It simply doesnot make sense.

What went wrong is the timing of this all. The PSI should make the costs lower. Now we have a PSI that takes the costs early. While everybody expects a second haircut or 3rd package will be required.
That is imho the main mistake.

Denis Cooper said...

I think it's both too late and too early for a managed alternative.

Too late, because 2009 was the time to think about whether the growing economic problems would make it necessary for some countries to leave the euro, and if so how that could be managed.

Instead the eurofanatics preferred to think about how to impose the Lisbon Treaty - and a fat lot of good that has been to deal with the economic problems, despite the Irish being told that it was essential for that purpose - and then in 2010 they decided to break the law in their desperation to stop the eurozone breaking up.

Too early, because they still won't accept that the euro was always a fundamentally bad idea, and they're still determined to do whatever they can, ethical or unethical, legal or illegal, to preserve the present eurozone intact.

Rik said...

1. With Greece nothing will go fully orderly. It is just a matter of degree. Nothing has gone close to structured with the Greece crisis, it is extremely likely that it will continue that way.
2. 1 Tn seems laughable.
200 Bn private debt of which:
-100 Bn with Greek banks;
-90+% of private bondholders haircut already priced in;
-looks like a lot of them will accept 70% haircut.
3. It is highly unlikely that while 90+% of private bondholders have already priced in a haircut/default for Greece, roughly the same group of investors have not priced in anything for the other PIIGS.
4. Not acting is also acting and any different plan has unknowns.
5. Here you could made that as till 2020 the situation is unclear there will be financial assistence required for the other PIIGS and investment in the whole EZ will be postponed till things have cleared up. Also rubbish, but maybe even realistically less rubbish than a 1Tn. pricetag for a unstructured Greek default.

Dennis Mansell said...

Errrm, IF this were true (which I doubt, considering the carefully timed 'leak'), the EU would be beter off completely bailing out Greece (debt EUR 600 billion) and the Greek population (debt EUR 200 billion) and just be done with it.

In short, if EVERY Greek refused to pay back ANY of their debts, including their own useless government, they would still 'just' evaporate EUR 800 billion.

Anonymous said...

Seen on Twitter, under #PSI:


#PSI, the 23rd letter in the #Greek alphabet. Today's ABC: A for impossible ratings - B for Bond swaps - C for CaC triggers - D for Default?"

Meanwhile, voluntary participation in the PSI is still nowhere near the aimed 75%, while the initially hoped-for 90% seems increasingly unlikely.


Rollo said...

If the EU had any decency, they would spend their efforts and their money helping Greece into an orderly and well planned default and exit from the Euro. Instead they spend our money on trying to strap up the failing structure, disregarding the way the Greeks are being crushed in the process. The agony will go on, because there is no solution to the systemic problems; and the longer it goes on, the more other olive growing countries will be dragged down, sucked dry and eventually be spat out after the Greeks.