Toward a Greek default

Economist
July 21, 2011

As European leaders gather in Brussels to settle on a new plan to address Greece's debts and—they hope—the broader issue of market confidence in the euro zone, details of a potential deal are emerging. It appears that German Chancellor Angela Merkel and French President Nicolas Sarkozy met last night with European Central Bank head Jean-Claude Trichet in an attempt to iron out their differences. A framework for an agreement was reportedly reached and will be presented at today's summit. No specifics are available, but a few key issues appear to have been settled.

First, it looks as though a haircut for Greek creditors is now likely. Ms Merkel has repeatedly asked that bondholders share the costs of the Greek bail-out, insisting that this was a necessary precondition for German citizens to accept an increased fiscal commitment to the periphery. The ECB had, until now, been adamently opposed to anything smacking of default, but Mr Trichet is seemingly now on board. The ratings agencies would likely place Greece in "selective default" in that event. It isn't clear whether the ECB would continue to make good on its threat not to accept defaulted debt as loan collateral. European leaders may find themselves needing to guarantee defaulted Greek bonds and/or find alternative quality collateral.

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