Greece on verge of default... what happens if it does?

Greece is expected to announce a bond swap deal with private sector creditors which will see at least half the value of their investments in its debt written off.

Such a deal is likely to tip the country into default, although that could mean several different things.

Greece's current ratings

The three big credit rating agencies - Fitch, Moody's and Standard & Poor's - downgraded Greece in July after the debt swap plan was unveiled, assigning it "highly speculative" status and warning that losses for private creditors would imply a default. Fitch rates Greece CCC, S&P rates it CC and Moody's Ca.

Selective or outright default?

Fitch and S&P make a distinction between a selective or restricted default, where a borrower stops making interest or principal payments on some debts, and an outright inability or refusal to repay creditors.

Market players often make similar distinctions, referring to "orderly and disorderly", "soft and hard" or "managed and messy" defaults.

Both rating agencies have said a debt exchange under which creditors take losses, whether voluntary or otherwise, would be a selective or restricted default.

S&P said in July it would revise Greece's sovereign rating to "selective default" when any debt restructuring is implemented, with the affected bonds being cut to D, its lowest rating, denoting a default.

Fitch's lead analyst for Greece, Paul Rawkins, said on Wednesday that Greece would be assigned its "restricted default" rating when the bond exchange period closes.

Moody's does not make a similar distinction but its lowest rating of C implies a default with little prospect for recovery of principal or interest.

What happenes afterwards?

S&P and Moody's each said in July that once a restructuring is completed they will reassess Greece's creditworthiness in light of its reduced debt burden, which is likely to mean its ratings are upgraded. S&P said it expected to assign "a low speculative-grade rating" to Greece, reflecting its still-high debt and uncertain growth prospects.

New bonds issued under the debt swap will also be rated, possibly - since some will be collateralised - at a higher level than unsecured Greek government bonds.

Fitch's Rawkins said Greece's restricted default rating would be maintained "for a short period" before it was reassessed, taking into account changes to the country's debt profile.

An outright default would be seen as a sign politicians had lost control of the single currency, and markets would immediately take aim at other weak countries such as Italy, Spain and Portugal.

Will there be a credit event?

The International Swaps and Derivatives Association (ISDA), has the final say on whether a "credit event" has occurred, triggering the payment of default insurance taken out on Greek bonds via the credit default swap market.

According to the latest data from DTCC , outstanding credit default swaps on Greek debt total $70.8 billion gross and $3.2 billion net. Forced losses for investors would almost certainly be considered a credit event, even as part of an "orderly" default.

Greek Prime Minister Lucas Papademos told the New York Times this week he will consider legislation forcing creditors to take losses if no agreement can be reached.

An outright default, where Greece does not meet interest payments or repay principal, would prompt ISDA to declare a credit event as grace periods expire.

Recent comments

"Greece will default very shortly. Whether there will be a solution at the end of the current rocky negotiations I cannot say," Moritz Kraemer, the head of S&P's European sovereign ratings unit, told Bloomberg Television on Monday.

"There is a lot of brinksmanship (going) on and a disorderly default will have ramifications on other countries but I believe policymakers will want to avoid that ... The game is still on."

"It is going to happen. Greece is insolvent so it will default," Edward Parker, Managing Director for Fitch's Sovereign and Supranational Group in Europe, the Middle East and Africa, told Reuters on Tuesday. "So in that sense it shouldn't be a surprise to anyone.

"We have said for a long time that we don't think this (private sector involvement) is the way to go, and we would treat it as a default," Parker said. "It clearly is a default, however they try to spin it."

"It would be a default regardless of the size of the NPV (net present value) loss," Fitch's lead analyst for Greece, Paul Rawkins, said on Wednesday.

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There is gun pointed to the head of each and every country; no country is immune to crisis: IMF chief Christine Lagarde

No country is immune from an "escalating" euro zone crisis and each one must act to head off the risk of a global depression, the head of the International Monetary Fund said on Thursday.

IMF Managing Director Christine Lagarde, speaking at the US State Department, said the outlook for the world economy is "quite gloomy" and warned that failure to act collectively could lead to protectionism and isolation reminiscent of the 1930s depression.

"There is no economy in the world, whether low-income countries, emerging markets, middle-income countries or super-advanced economies that will be immune to the crisis that we see not only unfolding but escalating," Lagarde cautioned.

"It is not a crisis that will be resolved by one group of countries taking action. It is going to be hopefully resolved by all countries, all regions, all categories of countries actually taking action."

The IMF has warned that it is likely to cut its 2012 growth projections, with the economy struggling with a worsening two-year euro zone debt crisis and sluggish US growth. There are also signs from falling Chinese factory output that manufacturers are struggling with waning global demand and tighter credit conditions.

European leaders last week agreed to lend up to 200 billion eurosto the IMF to help struggling euro zone states and are hoping non-European countries will also step in with loans provided through the global lender to help.

The IMF is currently in talks with member countries on providing additional resources to the Fund.

Lagarde said global economic leaders now needed to take a holistic approach toward addressing systemic weaknesses, such as those underscored by the current euro zone debt crisis.

"It is going to require efforts, it is going to require adjustment, and clearly it is going to have to start from the core of the crisis at the moment, which is obviously the European countries and in particular the countries of the euro zone," Lagarde said.

She cautioned, however, that democratic government processes often made quick fixes difficult, saying the collision of market expectations with political reality must be resolved.

"It is really that Gordian Knot that needs to be cracked, that needs to be addressed as collectively as possible, starting with those at the center but with the support of the international community probably channeled through the IMF," she said.

Lagarde noted some relative bright spots in the economies of Asia and Latin America, which she said had taken steps, with IMF help, during crises in the 1980s and 1990s to address weaknesses in their banking systems and financial regulatory frameworks.

"All those challenges that they faced in the days of the Asian crisis, of the Latin American crisis have now served them well," Lagarde said.

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