Greece at its most vulnerable

In a move that spooked international markets, bringing European and US stock markets to their worst day in 2012, Greece literally threatened its bondholders that it will default on their debt if they don agree to a €206 billion debt restructuring. The debt restructuring will wipe out €100 billion from Greeces debt and includes a haircut of 53.5 percent on investors holdings, reduction in par values of older bonds and new Greek bonds maturing in over 20 years. However, in order for the restructuring to be successful to prevent an outright default of the country, the deal needs the nod of a significant number of Greek bondholders - above 95 percent of bondholders for €100 billion of the debt to be wiped off. For those bondholders who refuse to participate in the deal, Greece "does not contemplate the availability of funds" to pay them, to quote the Financial Times. Unless the holdout deal materialises, it will not be able to secure €130 billion of bailout money it was promised towards the end of February. Only two days back, the International Institute of Finance warned that a disorderly Greek default could result in potential losses of about €1 trillion, putting further pressure on the need to avoid an outright default of Greece. The significance of this move is a testimony to the literal mess that the Greek economy has been mired into. The fact that the country is resorting to debt restructuring shows that it has officially declared itself incapable of meeting its obligations. Rating agencies such as the S&P and Fitch will likely consider Greece to be in selective or estrictive default once the countrys debt restructuring sees the light of the day. Markets had a negative knee-jerk reaction to the news in anticipation that a sufficient number of bondholders may not acquiesce to the proposed holdout deal. However, regardless of whether the restructuring deal is successful, most analysts and economists believe that a Greek default is just a matter of when and not if. While the country may succeed in getting itself bailed out temporarily, that is not going to bring down its colossal debt burden of over 140 percent of GDP. The situation is best described in the words of Nobel economics laureate Paul Krugman, quoted in the Bloomberg last month: "The Greek situation is essentially impossible. They will default on their debt. In fact, they already have. The question is whether they will also leave the euro, which I think at this point is more likely than not."