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Greek default: an unscripted tragedy

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(PARIS) - If Greece ends up defaulting on its debt, a possibility most analysts still consider unlikely although Athens's coffers are nearing empty, it will look nothing like a court-supervised bankruptcy procedure for a company.

Instead it will likely be an improvised process.

Q: What if Greece goes bankrupt?

A: A country can't go bankrupt in the same legal sense as a company, where a court makes the official determination that a firm has stopped making payments and then decides on measures to try to repay creditors.

States can fail to make payments, however. Greece could end up defaulting -- failing to pay interest or principal on its debts.

Q: When does Greece risk defaulting on its debt?

A: Finance Minister Yanis Varoufakis has indicated that Greece risks running out of cash to pay its debts by the end of May.

Greece has since 2010 been unable to do what other countries do with their debt: roll it over by borrowing new money on the market to repay bonds coming due. With investors no longer willing to lend to Athens at affordable rates, it was forced to seek an international bailout.

Disagreement between the new radical left government that took power in Greece in January and the EU and IMF has held up disbursement of the final 7.2 billion euros ($7.9 billion) in loans that the country should receive under the bailout programme.

The Greek state has been using various schemes to pay state workers and suppliers to free up enough cash to repay its international debt, but Varoufakis has said these measures are nearly exhausted.

Natixis investment bank economist Jesus Castillo said failure to pay suppliers on time was more of a payment incident rather than a default.

A default would happen if Greece did not make interest or principal payments on its foreign debt, with billions coming due in the coming months. However, at least one ratings agency, Standard & Poor's, said if Greece fails to make a payment to an official creditor, like the International Monetary Fund, it would not automatically change the country's rating to a selective default.

Q: What are the key repayment dates?

A: Greece owes the IMF and the European Central Bank 11.5 billion euros in June, July and August.

For Saxo Banque economist Christopher Dembik the crucial repayment is the 3.5 billion euros Athens owes to the ECB and central banks of other eurozone states on July 20.

"Until then I think that Greece has enought to keep the state running at a minimum and reimburse the IMF" smaller amounts due, he said.

Dembik also said Greece will likely be able to continue rolling over what it borrows on the local short-term (3 to 6 months) debt market. Greece has been unable to borrow for long terms since 2010 due to the high rates lenders seek.

If Athens doesn't reach a deal with the EU and IMF by July 20 then it could find itself defaulting.

Q: What happens if Greece does default?

A: The main risk, according to Castillo and Dembik, is a run on banks by Greeks and investors eager to get their cash out that triggers a collapse of the banking system.

That would have catastrophic consequences for the economy and a society which have already experienced years of recession and high unemployment.

But the economists don't see a chaotic default taking place because of the particular situation Greece finds itself in: after two bailouts and a writedown on debt held by private investors, some 70 percent of the country's debt is held by other countries and international institutions.

That puts Greece in a far different situation from Argentina, which defaulted in 2001 and is still being hounded in courts by investors.

While that makes the situation somewhat easier for Athens to manage, it doesn't make its resolution any easier.

Dembik believes a temporary solution could be found by introducing capital controls and pushing back repayment dates on the debt.

But with Greece's debt expected to soar to 180.2 percent of annual economic output this year, a long-term solution is likely to involve writing off part of -- or taking a haircut to -- the debt it owns to its EU partners and the IMF.

However, "it isn't possible politically to talk about a haircut before 2017," said Dembik.

A write-off would force accounting for the losses on Greek debt, a sensitive question when elections are due to be held in a number of European countries.

Analysts are divided if a Greek default would necessarily entail exiting the euro.

Certainly the government would be tempted to reintroduce the drachma, as it could print the currency to meet state spending.

In the medium-term, a weak drachma would increase the competitiveness of the Greek economy without the politically difficult task of cutting wages and pensions.


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