Greek default ‘would cost €1,000bn’

A disorderly Greek default would cause more than a €1,000bn of damage to the eurozone and could leave Italy and Spain dependent on outside help to stop contagion spreading, the main bondholders group has said.

Greek private creditors have until tomorrow night to say whether they will participate in a bond swap that is part of a bailout deal to help it manage its finances and meet a debt repayment on Mar 20.

Investors will lose almost three-quarters of the value of their debt in the exchange. Finance minister Evangelos Venizelos said on Monday it was the best deal they would get and those who did not sign up would still be forced to take losses.

Analysts said the Institute of International Finance document — marked “staff note: confidential” — may have been designed to alarm investors into participating in the exchange. “There are some very important and damaging ramifications that would result from a disorderly default on Greek government debt,” the IIF said in the Feb 18 document.

“It is difficult to add all these contingent liabilities up with any degree of precision, although it is hard to see how they would not exceed €1tn.”

If Greece misses the Mar 20 payment without a deal in place, this would be seen as a disorderly default and could be taken as a sign that politicians have lost control of the euro. Investors might then target other weak eurozone countries.

Spain and Italy might require €350bn in outside support to contain the fallout, the IIF said, while the cost of helping Ireland and Portugal could total €380bn over five years.

If the deal fell apart, the ECB would suffer substantial losses because its estimated €177bn exposure to Greece is over 200% of its capital base, the IIF said.

The bank lobby group, which helped negotiate the swap on behalf of creditors, also said bank recapitalisation costs could easily hit €160bn if no swap is agreed.

It could threaten the euro and would be a catastrophe for Greek living standards.

“Social strains (in Greece) would intensify as the economy reeled and unemployment surged from an elevated level already in excess of 20%,” the report said.

“When combined with the strong likelihood that a disorderly Greek default would lead to the hurried exit of Greece from the euro area, this financial shock to the ECB could raise significant stability issues about the monetary union.”

A dozen major Greek bondholders, all on the IIF steering committee that helped draw up the deal, said on Monday they would support the swap. They hold about one-fifth of the €206bn of bonds in circulation. The remaining investors are under pressure to sign up.