How do countries default?

A growing chorus of voices is urging the Greek government to restructure its debt as
fears grow that a €110bn bailout has failed to rescue the country from the financial
abyss and is forcing ordinary people into an era of futile austerity.

"It's better to have a restructuring now … since the situation is going nowhere," said
Vasso Papandreou, whose views might be easier to discount were she not head of the
Greek parliament's economic affairs committee.

Other members of prime minister George Papandreou's party have said that Greece is
locked in a "vicious cycle", unable to dig itself out of crisis with policies that can only
deepen recession.

A default is when a country misses a repayment on its debts. But the most likely
outcome for Greece is a "restructuring", a negotiation between Athens and its creditors
that would result in the owners of its bonds accepting that they won't get all their money
back.

Investors would shun Greek debt, making it hard for the country to borrow. But what
Europe's policymakers are more worried about is the knock-on effects for Greece's
lenders, many of which are German and French banks, which would have to declare
large losses. Portugal and Ireland would also have a strong incentive to follow suit.

Refusing to pay your debts has an impeccable pedigree: Edward III sowed chaos in
Florence in the mid 14th century by defaulting on a series of loans. Every country in
Latin America, apart from Brazil, followed suit in the early 19th century. Most recently,
Russia shocked world markets by defaulting in 1998, as did Argentina in 2001.

A default is when a country misses a repayment on its debts. But the most likely
outcome for Greece is a "restructuring", a negotiation between Athens and its creditors
that would result in the owners of its bonds accepting that they won't get all their money
back.

Investors would shun Greek debt, making it hard for the country to borrow. But what
Europe's policymakers are more worried about is the knock-on effects for Greece's
lenders, many of which are German and French banks, which would have to declare
large losses. Portugal and Ireland would also have a strong incentive to follow suit.
Refusing to pay your debts has an impeccable pedigree: Edward III sowed chaos in
Florence in the mid-14th century by defaulting on a series of loans. Every country in
Latin America, apart from Brazil, followed suit in the early 19th century. Most recently,
Russia shocked world markets by defaulting in 1998, as did Argentina in 2001.

Meanwhile, Germany is drawing up plans to restructure Greece’s sovereign debt

in the event that Athens’ economic reforms fail to heave the country out of its
budget crisis.

Its intentions fly in the face of the European Central Bank, which fears that asset write-
downs could trigger a financial crisis at a time when the banking system is still bruised
from the last one.

Apr.17.2011

Mircea Halaciuga, Esq.

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Financial news - Eastern Europe