Wall Street Journal
June 8, 2011
Not all government debt defaults are created equal. A default—the failure of a creditor to repay a scheduled interest payment or capital repayment in full and on time—can occur with the consent of creditors or without. History shows defaults can deliver rapid benefits to a borrower or destroy confidence in its economy for years; they can shake the financial system, or not.
The technical definition of default varies among credit-rating agencies, accountants and lawyers. And a default as defined by a rating agency isn't necessarily a "credit event" that would lead to payouts to holders of credit-default swaps, which are a form of insurance against nonpayment of debt.
Although some options now being considered for Greece's bailout package would be defined as a default by the rating agencies, they wouldn't all force bondholders to take explicit losses—or "haircuts"—on their bonds. Many analysts believe, because of Greece's heavy debt burden, that such losses are highly likely in the years to come. But providing Greece gets more bailout money by Aug. 20, when €5.9 billion ($8.6 billion) of government bonds come due, many analysts say that, even if Greece's second bailout leads to a default, it shouldn't generate a financial crisis this year.
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