September 15th, 2011
06:22 PM GMT
London (CNN) - Greece is almost certain to default on its debts, but the type of default – and its impact on the markets, Europe and the world – is yet to play out.
A default can come in three different forms:
A “selective default”. Under the terms of the second bail-out, some creditors can roll over their debt and take a “hair-cut”, or losses on the money they are owed. This is done to protect against the possibility of greater losses in the future. It is limited, controlled and understood. Crucially, it is expected.
The greater fear is that Greece defaults on a much greater scale. An “orderly default” would be one that is planned for, so creditors – and the markets - are prepared and have a plan to deal with losses in the value of their investments. While markets will be volatile, there will be soothing statements from eurozone leaders and it will be controlled.
The worst case scenario is that Greece defaults outright and without warning. This is what people are referring to as a "disorderly default,” and that is the big fear. This would be hugely significant because it will almost certainly lead to contagion. It will not necessarily lead to Greece being kicked out of the euro, nor the collapse thereof. It will however pose fundamental questions about the foundations of the euro project. Market reaction could be as bad as when Lehman Brothers collapsed in 2008.
This all comes against a backdrop of serious financial problems in other major eurozone economies – particularly Italy, which is one country regarded as too big to bail out.
Greece was given a second bailout on July 21. The centrepiece of that agreement was the expansion of the bailout fund – known as the European Financial Stability Facility, or EFSF.
All the countries in the euro must agree on this change - and that is where the difficulty currently lies. Some, like Finland, want collateral in return for participating. Others, like some German politicians, are philosophically opposed. Germany’s vote, which is key, comes on September 29.
Monitoring all this is the troika – European Central Bank, European Union and International Monetary Fund – delegation to Greece. It must approve the measures Greece has taken in terms of cutting its deficit. The delegation abruptly cut short their first monitor visit and still haven't returned despite Greek Prime Minister George Papandreou passing the necessary measures.
A Eurogroup and EcoFin meeting starts in Poland tomorrow. In a surprise move, U.S. Treasury Secretary Tim Geithner is attending. Action, rather than talk, can be expected at this meeting.
The troika return to Greece on September 19. This return has been delayed multiple times. Their report is due at the end of September, although no date has been set.
Another date for the diary is the International Monetary Fund and World Bank meeting in Washington DC on September 23 and 24, followed by the G20 Finance Ministers meeting in Paris on October 15. The detail of the discussions could well be dictated by the type of default which Greece ends up tripping on.
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