By Forcing Austerity, Greek Default Is Assured

This Perils-of-Pauline melodrama will end as it only can, in default. Forced austerity destroys whatever ability Greece has left to adjust within the current arrangement. People might as well adjust to the new reality now:

Greek private creditors have until Thursday night to say whether they will participate in a bond swap that is part of a bailout and restructuring deal to help it manage its finances and meet a debt repayment on March 20.

Investors will lose almost three-quarters of the value of their debt in the exchange. Finance Minister Evangelos Venizelos told Reuters on Monday it was the best deal they would get and those who did not sign up would still be forced to take losses.

..."It is difficult to add all these contingent liabilities up with any degree of precision, although it is hard to see how they would not exceed 1 trillion euros."

If Greece misses the March 20 payment without a deal in place, this would be seen as a disorderly default and could be taken as a sign that politicians have lost control of the euro. Investors might then target other weak euro zone countries.

Spain and Italy might require 350 billion euros in outside support to contain the fallout, the IIF said, while the cost of helping Ireland and Portugal could total 380 billion euros over five years.

If the deal fell apart, the European Central Bank would suffer substantial losses because its estimated 177 billion euros exposure to Greece is over 200 percent of its capital base, the IIF said.

The bank lobby group, which helped negotiate the swap on behalf of creditors, also said bank recapitalization costs could easily hit 160 billion euros if no swap is agreed.

It could threaten the euro and would be a catastrophe for Greek living standards.

"Social strains (in Greece) would intensify as the economy reeled and unemployment surged from an elevated level already in excess of 20 percent," the report said.

"When combined with the strong likelihood that a disorderly Greek default would lead to the hurried exit of Greece from the euro area, this financial shock to the ECB could raise significant stability issues about the monetary union."