Greece will default on its debt by March at the latest, according to Costa Vayenas, the head of emerging market research at UBS Wealth Management. At a press briefing in Johannesburg this week, Vayenas said that “trigger points” for a default were coming up “in the weeks and months ahead”.
Sovereign defaults are not uncommon. But the risks of contagion are growing in an interconnected world and the collateral damage would be extensive, including to emerging markets. A recession in the euro zone will reduce its ability to buy goods from other markets, among them South Africa.
Explaining the risks to Greece, Vayenas said the country had funds to go on with, from a recent tranche of a previously agreed rescue package. But the International Monetary Fund (IMF) will review the situation in December and in March – monitoring the country’s progress in restoring its financial health – before providing further tranches.
Vayenas said the IMF would discover the situation had deteriorated; and if Greece made it through the first review, it would be unlikely to make the second. The global lender of last resort can only lend to borrowers capable of paying back the loan. So, in the circumstances, the IMF would not agree to the next tranche.
Vayenas noted that, next month, Greece was committed to repaying e12 billion (R132bn) worth of debt and, in March, e17bn; and without assistance it would be unable to meet the commitments.
An agreement reached last week by European policymakers, on managing a looming default, was followed by a surprise announcement this week of a Greek referendum on whether to accept it. A negative outcome would make last week’s arrangement irrelevant.
However, Vayenas questioned the merits of the deal. He said institutional holders of Greek debt had not agreed to accept a 50 percent reduction in its value – the lynchpin of the agreement.
“This negotiation still has to take place,” he said. The problem for creditors is that, for credit insurance to kick in, Greece would have to break its contractual undertakings. And this would not be the case if the haircut is voluntary.
Vayenas said, in addition, “the 50 percent haircut does not apply to huge chunks of the debt” – including funds owed to the IMF and the European Central Bank or to loans from other European countries.
“We calculate that the real haircut on what is left is actually 95 percent.”
A problem with getting agreement to the haircut, Vayenas said, was that “about e100bn worth of debt is missing”. In other words, the identity of the bondholders is unknown. “You will only discover who holds the debt when Greece defaults.”
A default and even a haircut will hit creditor banks, many of which have not started writing down the value of the bonds they hold. “They argue that Greece has not yet defaulted – it is paying what is contractually due. And accounting rules are being interpreted differently by different institutions.”
Vayenas said an IMF programme “normally helps a country back on to its feet within three years. But this time the hole is deeper than anyone anticipated.” - Business Report