Greece default: an unscripted tragedy that may end with euro ending

(PARIS) - If Greece ends up defaulting on its debt it will look nothing like a court-supervised bankruptcy procedure for a company.

Instead it will likely be an improvised and chaotic process that could end with a messy exit of the euro and even the European Union.

Q: Bankrupt or default?

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.

Ratings agencies like Standard & Poor's do declare countries in default. However, they are more concerned with private creditors, and have indicated they may not automatically declare Greece in default if it fails to make a payment to an official creditor.

Q: When does Greece risk defaulting on its debt?

A: The danger date is June 30. On that date Greece should repay around 1.6 billion euros to the IMF, and there is little chance that it will be able to do so unless it has reached a deal to unlock the disbursement of the final 7.2 billion euros ($8.2 billion) in loans under its bailout programme.

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 bailout funds.

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 these measures are practically exhausted.

Eurozone finance ministers are unlikely to approve the disbursement of the funds at their Thursday meeting in Luxembourg.

Time to find a solution is rapidly disappearing as a deal must be approved in several national parliaments, including Germany's.

After the IMF payment on June 30, Greece has another one to the IMF in mid-July worth around 450 million euros.

Grece owes 6.7 billion euros to the European Central Bank in July and August, and must repay 2.0 billion euros in short-term treasury bills coming due.

Q: What happens if Greece does default?

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

The Greek government would have an incentive to introduce capital controls. The European Central Bank, which has been keeping Greek banks on life support, would have no choice but to pull the plug if it doesn't get its payment due on July 20.

Q: Default = Grexit?

A. While Greece wouldn't be the first nation to default, it would be the first for a eurozone member. If the country did default and found itself unable to borrow euros, the Greek government would have a large incentive to reintroduce the drachma, which it could simply print, to pay salaries and pensions.

Even the Greek Central Bank warned this week that failure to reach a deal "would lead initially to a Greek default and ultimately to the country's exit from the euro area and -- most likely -- from the European Union."

There are no treaty provisions for leaving the euro as European leaders didn't want uncertainty hanging over the single currency, while a nation can vote to leave the EU bloc.

But a de facto exit from the euro by Greece would set a possibly dangerous precedent.

There is a risk of market "contagion" as investors not wanting to get burned might sell off debt and stocks of other eurozone countries seen as being vulnerable.

The EU has in the past three years erected more "firewalls" to dampen market pressure and the ECB is already engaged in a massive purchase of government bonds.

Q: Could a default still be avoided?

A: Yes, if Greece and negotiators from the EU and IMF reach agreement on which reforms need to take place and the 7.2 billion euros in bailout loans are quickly disbursed.

But in the longer term the eurozone can't avoid a discussion of debt relief for Greece, which has shot up to over 170 percent of GDP as the bailouts have been in the form of loans.

The 2012 writedown of Greece's debt concerned private creditors, but its debt levels have rebounded and most of its debt is held by other countries and international institutions.

Q: Could Greece's debt be written off?

A. The IMF has been encouraging a partial debt reduction as its lending rules require that recipients of aid have sustainable debt loans.

However the EU, whose states and institutions hold three quarters of the Greek debt which totalled 312.7 billion euros at the end of March, is reluctant to consider this politically sensitive question.

The Greek government doesn't fail to remind the EU that in 2012 it held out the possibility of some debt relief.