Reuters Poll: Greece Looks Likely to Default, but Keep Euro
Friday, 16 Sep 2011
Greece will likely default on its sovereign debt within a year after it exhausts the patience of its eurozone partners, but there is only a one-in-five chance it will leave the 17-nation eurozone as some in Germany have called for, a Reuters poll of economists showed on Friday.
Frustration has risen among core eurozone countries due to Athens' inability to meet the fiscal targets set out under its international bailout, heightening market fears of a default or even Greece's exit from the eurozone.
The poll of more than 50 economists across Europe, taken over the last two days, gave a 65 percent chance Greece would default with half of respondents saying it would do so in within 12 months.
While credit markets are pricing in a greater than 90 percent likelihood of default, it is significant that economists now also sense this outcome, since they try to see past the whims of volatile financial markets.
The poll also suggested that a joint eurozone bond, seen by many economists as the only option that will solve the debt crisis, still has a 40 percent chance of taking off even after Germany's constitutional court effectively banned Berlin from taking part.
Economists' forecasts on the likelihood of a Greek default ranged from 25 percent to an absolute certainty.
"In the absence of measures to ensure ongoing supply of liquidity to Greece, a debt default may be the only way to lance the boil which is building up in the markets," said Peter Dixon, economist at Commerzbank in London.
Citing the lack of options on the table, Dixon put the likelihood of default at around 90 percent.
Athens still has to plug a 2 billion euro ($2.8 billion) hole in its 2011 budget and meet the deficit goals its European Union/International Monetary Fund lenders have set to continue bankrolling the cash-strapped country.
Greece plans to privatize or shut down state organizations, cut the number of civil servants and raise taxes but revenues have been lower than hoped for, hampered by an economy that contracted at an annual pace of 5.5 percent in the first quarter.
On Sunday the country slapped a new tax on real estate to please its international lenders, just days before EU and IMF inspectors, the troika, return to Athens to hear how the government plans to overcome delays and missed fiscal targets.
German and French leaders said after a conference call on Wednesday with Greek Prime Minister George Papandreou, whose government has pledged to meet all its obligations, that they were determined to keep Greece in the euro.
Economists in the poll gave just a median 18 percent chance Greece would abandon the common currency it fully adopted in 2002.
Eurozone leaders have stated their determination to find answers to Greece's debt problem, without it leaving the single currency and, coupled with a coordinated push by global central banks to boost pressured European banks, this has sent stocks higher and Bund futures lower.
A bond swap is one such proposal designed to help Greece avert a painful default, whereby holders of Greek debt can swap bonds with a maturity of up to 10 years with less risky, longer dated paper.
Greece aims for an investor participation rate of 90 percent — a threshold it says is necessary for the swap to go ahead — but the poll suggested the swap would only attract between 70 and 80 percent of investors.
COMMON BOND
Economists were largely pessimistic about the chances of a joint euro area bond coming to fruition.
The European Commission will soon present options on how the common eurozone bonds might be issued, its president Jose Manuel Barroso said on Wednesday, but the poll suggested that Germany's staunch opposition might scupper plans.
The poll showed a 40 percent chance that the bonds will come to being.
"I think the joint euro bond has been virtually ruled out by Germany and unless there's a change of heart there, and I don't really see any strong political support from any quarter in Germany for such a move, then it's off the agenda," said Stephen Lewis, economist at Monument Securities in London.
A ruling by Germany's top court last week made it virtually impossible for Berlin to sign up to joint eurozone bonds even it wanted to, according to legal experts.
Until now, peripheral government bond markets have received limited support from the European Central Bank through its Securities Market Programme (SMP), in which it has been making sterilized purchases of Spanish and Italian debt, for example, to calm their bond markets.
The poll showed the ECB is probably only around two-thirds of the way through the SMP. Having already spent 143 billion euros ($197.60 billion) as of this week, economists expect the ECB will eventually spend around 250 billion euros on bonds.
There was little consensus over how long the program would run, but most respondents thought it would wind up by sometime next year.
In any case, the poll suggested that for all the ECB's Greek bond purchases under the SMP, a default looks difficult to avert.
"But before politicians allow this to happen, they need to think very carefully about the consequences of such actions," said Commerzbank's Dixon.
"The fact that a default would represent a failure of all other options, and is therefore a measure of last resort, suggests that it is wishful thinking to expect any such default to be 'orderly.'"
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