Europe Running Increasing Risk of 'Disorderly Default' of Greece or Ireland

Seeking Alpha
April 15, 2011

The risk that Greece or Ireland will default in a disorderly fashion will increase once the European Financial Stability Facility expires in 2013, according to Oxford Analytica.

Credit default swap rates show that the market does not expect defaults before the European Financial Stability Facility (EFSF) expires in 2013, yet they also point to the impossibility of Greece, Ireland and Portugal repaying their debts. This implies a disorderly default, since the euro-area has no orderly default mechanism and seems unlikely to acquire one.

• To create an orderly default mechanism for the euro-area requires changes to the Lisbon Treaty, which would almost certainly be challenged.

• An orderly default mechanism would transfer a defaulting country’s national sovereignty over fiscal policy to the EU, the ECB or the IMF.

• By insisting on protecting senior bondholders, the ECB is taking on greater risk itself.

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