A Timeline for Greek Default

Willem Buiter, the chief economist with Citigroup Global Markets in London and a former member of the Bank of England’s monetary policy committee, has provided the Toronto Globe and Mail with something of a timeline for Greek default.

[According to Buiter] the first step for insolvent Greece – an extension of debt maturities – will occur later this year or early next, despite the fervent denials of the politicians and the vocal, almost hysterical, opposition from the European Central Bank.

He predicts the following step, “a hard restructuring with serious haircuts, one way or the other, for sovereign creditors,” will occur in mid-2013, when the new European Stability Mechanism is set to replace existing bailout facilities.

Buiter then went on to explain why the ECB is so much against defaults.

For ECB chief Jean-Claude Trichet and other leading voices inside the central bank, “any form of sovereign debt restructuring or senior bank debt restructuring is like swearing in church,” Mr. Buiter says. “This denying the inevitable only makes things worse when they do happen. Adequate preparation apparently is not taking place in Frankfurt.”

In arguing so vehemently against defaults, the ECB has a deep self-interest, because of its massive exposure to peripheral Europe’s sovereign debt. This includes €76-billion worth of direct bond holdings, as well as a much larger, undisclosed amount held as collateral for loans to European banks. “So the ECB is conflicted in this and ... that makes its message less convincing,” Mr. Buiter argues.

Of course, there is one other option Buiter did not bring up. The ECB can print more euro as a way out of the PIIGS crisis. It would be extremely damaging in terms of price inflation for the entire Euro Zone, but I don't think this option is off the table.

Bottom line: Defaults or price inflation, it is not going to be pretty.