CSFI roundtable: Economists agree on likely Greek default

Economists from think tanks and banks alike predict a Greek default is likely, echoing the outlook given by ratings agencies in the week since a second bailout of the sovereign was agreed.

Greece will default, say economists, but the timing of that default is a bone of contention, a roundtable debate hosted by the Centre for the Study of Financial Innovation (CSFI) on Europe’s financing problems found.

“Greece’s history does not give a whole lot of hope,” said Citi economist Ebrahim Rahbari, adding little enthusiasm exists internally for the sovereign “to dig itself out of a hole”. Calling for an orderly default, Rahbari emphasised the need for reform, in particular “tackling tax evasion among protected professions”.

Director at the CSFI Andrew Hilton called for radical changes within Greece, including a dramatic deficit reduction of 50%, a large drop in interest rates the sovereign has to pay and a major haircut for its bonds. He predicted Greece will not willingly exit the euro.

In better news for both Greece and Europe, Rahbari said head of the European Central Bank (ECB) Jean-Claude Trichet’s successor Mario Draghi will be far less dogmatic about restructuring debt and open to a pragmatic approach. Europe will reach “not a full resolution, but have a substantial part of it addressed” by 2013, namely on sovereign debt restructuring and banking recapitalisation, he said.

Europe Economics’ Andrew Lilico formerly at UK centre-right think tank Policy Exchange had a dim outlook for Greece’s future. “Greece will default, it will leave the eurozone or be ejected by 2013,” he said.

An Irish banking sector default will follow, he said, then possibly Portugal. Spain is likely to impose debt-equity swaps on bank bondholders, he said, questioning the impact of such a move.

But the eurozone’s outlook is improved in the medium term, according to Lilico, with the region performing more stably than it did in the 1970s. In those years, Europe was impacted negatively by a series of events, including the collapse of the Bretton Woods agreement formed in the latter part of World War II, the 1973 oil crisis, a stock market crash the following year and subsequent recession.

“The euro will be stronger than people anticipate,” said Lilico.

Short term risks remain however, warned euro-sceptic think tank Open Europe’s Raoul Ruparel. He expects the European Financial Stability Facility (EFSF), a fund created to prop up the region’s beleaguered sovereigns, will fail to achieve the scope needed for adequate support.

Ruparel raised doubts over whether individual European parliaments which have yet to ratify an extension of the EFSF’s powers will do so. He warned there is a “big intermediary stage” before the extension is implemented in practice, and questioned where interim financing will come from. The ECB is unlikely to step in, he said.

That threatens the attempt by policymakers to stop contagion spreading to Spain and Italy, while a Greek default is likely in the next year, he added. Ireland and Portugal will leave the eurozone in the next couple of years, said Ruparel.

His colleague Mats Persson argued Greece will have to default. “Will it be able to get its economy back on track?” he asked, answering “no”. He also said a political gamble was at play, and it is debatable in the long term whether taxpayers in Europe will be willing to accept the losses imposed on them.

Italy meanwhile is “irrelevant”, said Lilico from Europe Economics. He said the country is inherently tied up with the region’s core, having partnered with Germany and France for 60 years.

“Italy will not default in Europe, it will not choose to leave the euro,” he said. “There will be a euro with six core members, or no euro.”

“Italy leaving the euro is Armageddon, it’s over,” said Lilico. But he did not rule out the possibility of the sovereign defaulting outside the euro, should the currency collapse.

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