Greece Heads Toward Default

Wall Street Journal
Editorial
January 6, 2012

Greek Prime Minister Lucas Papademos told a group of labor-union leaders Wednesday that he expected that a deal on a 50% haircut on Greek government bonds would be sealed within two weeks. A day earlier, a government spokesman had warned that without a deal, Greece would be forced out of the euro and into a hard default. The trouble for Athens is that the prime minister's statement looks increasingly doubtful, and avoiding default may no longer be possible.

Of Greece's €350 billion or so in debt, only about €206 billion is still held by investors. The rest is owed to the EU, the IMF, or held by the ECB through its emergency bond-purchasing program. It is only that first €206 billion that is being threatened with haircuts and restructuring, which is why Athens needs a 50% reduction in the value of that debt to reduce the total it owes by €103 billion. The IMF, in turn, has estimated that this would leave Greece with a sustainable debt burden of only 120% of GDP. That assumes fairly optimistic things about future economic growth, tax collection and so on.

Most of Greece's big creditors agreed in principle to a 50% reduction in the value of what they're owed back in October. That was after an earlier agreement on a 21% reduction was revealed to be woefully inadequate.

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