Eurozone defaults


According to recent CDS spreads the probability of a Greek default in the next five years is around 58%, just in front of Venezuela at 55%. Heading the other PIIGS are Ireland with a default probability of 37%, and Portugal 33%. Germany and France are desperate to avoid or defer default, since French and German banks still own a lot of eurozone debt. However, if I were the Irish finance minister I wouldn’t care less about French and German banks, and would be negotiating a restructure now. What is really interesting is the typical EU response to this mess – let’s rename default. Apparently Greece won’t consider default, but they may “re-profile” or enter into “voluntary distressed extension” according to the Financial Times last Friday. That should solve the mess.

4 Responses to "Eurozone defaults"
  1. Mark,
    AIUI, the previous Irish government guaranteed Irish bank debt.  So, the first thing the new government could/should do is default on that guaranteee rather than default on its own debt.  I don’t know if this gets it off the hook though.

  2. The great thing about sovereign debt is that there is an almost infinite number of ways to default. “We didn’t guarantee it” is as good a means as any.

  3. Mark,
    I think you are missing my point.  The guarantee that I am talking about is on bank debt, not on sovereign debt.  Now, you can call this a “default” if you like, but it does not affect the holders of sovereign debt and so should not be factored into the CDS spread on that debt.

  4. I absolutely agree – though this is only true of Ireland and not Greece or most of the other countries likely to default. The commitment of the previous Irish government to guarantee the bank debt turned out to be a disaster. But whether a default on sovereign debt or on bank’s commitment there needs to be restructuring.

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