Greek default? It's already happening, debt deal or not.
Greek debt swap may not be a default technically speaking, but it's still a default. Holders of Greek debt and Greece's citizens are feeling its pinch.
Sovereign default, as a rule, is nasty business. It ripples throughout the world's financial system, rattling investors and sparking huge sell-offs.Skip to next paragraph
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That is why the investing world is so focused on Greece, which is teetering on the edge of default. On Tuesday, markets tanked on worries that enough holders of Greek debt might not agree to the restructuring deal that had been negotiated. The deadline is Wednesday. Some analysts warn that such a default would trigger another financial crisis on the order of the 2008 meltdown after the failure of Lehman Brothers, perhaps worse.
By Wednesday, news out of Greece was a little more reassuring. At least two-thirds of Greece's debt-holders are likely to accept the restructuring, which would trigger collective-action clauses that would force all the bond-holders to accept the deal. If 90 percent of the bond-holders take the deal, then it wouldn't trigger a default, technically speaking.
But make no mistake: Greece is defaulting, even if it's dubbed "voluntary.' The banks and other holders of its debt will get back only a fraction of what they invested. This is how nations work off their excess debt: Everyone from taxpayers to bond-holders takes a hit. It's a process that Portugal, Japan, and other nations will have to go through to bring their debt back down to a manageable level.
Greece is an example for other nations of what it's like to go through the economic wringer of default. It isn't pretty.
In February, Samantha Parisi was fired from her job at Thalatta Shipping, a respected maritime company in Thessaloníki, because of a downturn in business. It's a common refrain throughout Greece. In her family, "we are three people and only my brother is working 'under the table' in a cafeteria. My mother is unemployed for two years now and has no chance whatsoever finding a job," says Ms. Parisi, a graduate of The Citadel in Charleston, S.C., in an e-mail. "I am seriously thinking about going to Germany."
Already in its fifth year of recession, Greece's economy has shrunk 16 percent (a contraction three times larger than the United States endured doing its recent Great Recession.) And the Greek downturn shows no sign of abating: nearly half of it happened last year. Default "will intensify that recession and lower economic activity," says Richard Phillips, senior analyst at S-Network Global Indexes, a publisher of financial indexes based in New York.
"You wake up in the morning and there is another store closed," says Lambros Semertzidis, an accountant also from Thessaloníki, in an e-mail. "All the companies are laying off people. Nobody pays anymore.… We do have clients and work, but nobody pays on time."